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Leaving your job introduces a range of questions about your 401(k) plan, including how long you can keep it with your old employer. This guide delves into this topic, providing insights into the options available to you and the factors influencing your decision.
Understanding Your 401(k) Options After Leaving Your Job
When you leave your job, you have several options regarding your 401(k) plan:
- Leave it with your old employer: This is a viable option if you have more than $5,000 in your account. However, if your balance is less than $5,000, your former employer may cash out the funds or roll them into another retirement account.
- Roll it over to a new employer’s 401(k) plan: If your new employer offers a 401(k) plan, you can roll over your old account into it. This allows you to consolidate your retirement savings and potentially benefit from different investment options.
- Roll it over into an IRA: If your new employer doesn’t offer a 401(k) plan or you prefer more control over your investments, you can roll over your old 401(k) into an IRA. This gives you access to a wider range of investment options and potentially lower fees.
- Cash it out: While possible, cashing out your 401(k) is generally not recommended. You will have to pay taxes on the entire amount withdrawn, and you may also face a 10% early withdrawal penalty if you are under age 59½.
Factors to Consider When Deciding How Long to Keep Your 401(k) at Your Old Employer
Several factors can influence your decision on how long to keep your 401(k) at your old employer:
- Account balance: As mentioned earlier, your former employer may cash out your 401(k) or roll it into another account if the balance is less than $5,000.
- Investment options: If you are satisfied with the investment options offered by your old employer’s 401(k) plan, you may choose to keep your account there. However, if you are looking for more investment choices or lower fees, rolling over your 401(k) into an IRA or your new employer’s plan may be a better option.
- Fees: Compare the fees associated with your old employer’s 401(k) plan to those of other retirement plans, such as IRAs or your new employer’s plan. Lower fees can result in significant savings over time.
- Convenience: If you prefer to keep your retirement savings in one place, leaving your 401(k) with your old employer may be the most convenient option. However, if you want more control over your investments, rolling over your 401(k) into an IRA or your new employer’s plan may be a better choice.
Additional Considerations:
- Tax implications: Be aware of the tax implications of each option. Cashing out your 401(k) will trigger immediate tax liability, while rolling it over will defer taxes until you withdraw the funds in retirement.
- Early withdrawal penalties: If you are under age 59½, you may face a 10% early withdrawal penalty if you cash out your 401(k). However, this penalty does not apply to rollovers.
- Required minimum distributions (RMDs): Once you reach age 73, you are required to start taking RMDs from your traditional 401(k) and IRA accounts. However, you are not required to take RMDs from your current employer’s 401(k) plan if you are still working.
Ultimately, the decision of how long to keep your 401(k) at your old employer is a personal one. Carefully consider the factors discussed above to determine the best option for your individual circumstances. If you are unsure, consult with a financial advisor who can provide personalized guidance.
Frequently Asked Questions (FAQs)
Q: How long can I keep my 401(k) at my old employer if I have less than $5,000 in my account?
A: If your 401(k) balance is less than $5,000, your former employer may cash out the funds or roll them into another retirement account. However, they cannot force you to take any action without your consent.
Q: Can I roll over my 401(k) into a Roth IRA?
A: Yes, you can roll over your traditional 401(k) into a Roth IRA. However, you will have to pay taxes on the amount rolled over.
Q: What happens if I don’t roll over my 401(k) within 60 days?
A: If you don’t roll over your 401(k) within 60 days, the money will be taxable, and you may face an additional 10% early withdrawal penalty.
Q: What is a direct rollover?
A: A direct rollover allows you to transfer funds from one qualified retirement account to another without taking possession of the money. This is the preferred method for rollovers as it avoids any tax implications or penalties.
Q: What is a required minimum distribution (RMD)?
A: An RMD is the amount you must withdraw from your retirement accounts, such as traditional 401(k)s and IRAs, once you reach age 73.
If you have an outstanding 401(k) loan
According to Mat Sorensen, CEO of Directed IRA and Directed Trust Company, “you have the option to repay the loan to an IRA and you have until your personal tax return deadline of the following year [including extensions] to contribute that repayment amount to an IRA” if you borrowed money from your 401(k) and you’re leaving the company, whether voluntarily or not, because of the 2017 Tax Cuts and Jobs Act.
According to Ian Berger, an IRA analyst with Ed Slott and Company, “the plan will reduce your vested account balance in order to recoup the unpaid amount” if you are unable to repay the loan within the specified period. “This is called a loan offset. ”.
“I believe that a lot of people overlook the fact that they need to make payments on their loans,” says Wayne Bogosian, co-author of “The Complete Idiot’s Guide to 401(k) Plans.” ”.
If you don’t pay back the loan, Bogosian says you will pay a penalty equal to 10% of the amount you borrowed if you’re under 59½. The loan amount will also be considered income and may be subject to tax.
Taking out a loan from your 401(k) is essentially borrowing from yourself, but for some people, such as those who are unemployed and have no other source of income, need money for medical bills, or are buying their first home, it might be a wise choice. However, there are many things to consider before doing so.
You still have options below if you are unable to repay the loan to your 401(k), aside from the possible tax consequences mentioned above.
What to do with your 401(k) after leaving a job
When you leave an employer, you have several options:
- Leave the account where it is
- Transfer funds to your new employer’s 401(k) either before or after taxes.
- Transfer it out of your new employer’s plan and into a traditional or Roth IRA.
- Take a lump sum distribution (cash it out)
However, your former employer can easily cash you out if there is less than $1,000 in the account.
The truly wise course of action for you will depend on your unique situation and objectives.
Some items to consider include:
- Your current account balance
- IRAs do not offer the same creditor protection as workplace retirement plans, so you may be afraid of collection actions.
- How well your new employer’s retirement plan compares to your old one in terms of fees, investment options, and loan acceptance
- Your options for investments in an IRA that are not part of your employer’s plan
The good news is that you are not required to make any decisions regarding your current 401(k) right now. To go over your alternatives, you might want to first consult with a financial advisor.