Does Your Old 401(k) Miss You?
These days, people switch jobs an average of five to seven times during their working careers. If you’re the typical job-changer, and are diligent about contributing to each employer’s 401(k)—as you should be!—that means you could leave a trail of five to seven different retirement accounts behind you.
While you happily move along to greener pastures, whether it’s a new job or retirement, what you do with your old 401(k) is an important decision. So it’s critical for you to understand the four options generally available to you, and for you to make an informed choice:
Option 1. Leave the money where it is
If you have more than $5,000 in your account, your employer can’t force you to move the money, and you may be perfectly happy letting your nest egg continue growing tax-deferred in the investment options provided. However, you won’t be able to make contributions any longer, and other fees or plan limitations may kick in. If you have less than $5,000 in your account, your employer very well may require you to move the money elsewhere. In fact, if it’s less than $1,000, your employer can distribute the funds to you automatically, forcing you to pay the resulting taxes and any penalties that apply. (Between $1,000 and $5,000, your employer would have to roll it into an IRA for you.) Find out what your plan’s rules are, and don’t wait to take action!
Option 2. Transfer the money to your new employer’s plan
If you’ve landed a new job, your new employer’s plan may accept rollovers, meaning that you could move the money from the old plan to the new. This certainly helps consolidate accounts, while keeping your money growing tax-deferred. Another benefit: If you work for the employer past age 70-1⁄2, when minimum required distributions typically are required, you may be able to defer them. However, many employers’ plans don’t allow such rollovers, or make you wait as much as a year before you can begin participating. Since your former employer may not wait to distribute the proceeds of your account, it’s best to find out the rules of your new employer’s plan quickly if this option appeals to you.
Option 3. Withdraw the money
Unless you have an emergency expense you simply can’t pay for any other way, cashing out your retirement account should be your last resort. In addition to putting you further behind in saving for retirement, you’ll be socked with federal taxes, state taxes, and—if you’re less than age 59-1⁄2 or separate from your employer before age 55—a 10 percent withdrawal penalty! Depending on your individual tax situation, you could wind up with as little as 60 percent of your original vested balance in your pocket—clearly not a good return on your investment.
Option 4. Roll over the money to an IRA
If you can’t keep your money in your former or new employers’ plans, and don’t want to cash out (good for you!), moving your retirement savings to an Individual Retirement Account will make sense. An IRA certainly can help you consolidate all of your retirement savings in one tax-advantaged account, without triggering tax withholding or withdrawal penalties. What’s more, if you’re less than age 70-1⁄2, you may be able to continue making potentially tax-deductible contributions.*
Typically, you’d want to open the IRA first, letting the institution know you’ll be funding it with proceeds from a rollover. Then, contact your 401(k) plan provider and ask for the appropriate forms to initiate what’s called a “direct rollover,” whereby the check for the balance in your account is made payable to the receiving institution where you opened your IRA. Note that a rollover is reportable to the IRS, though no taxes or withdrawal penalties are owed. Further, only one rollover is allowed per year, though there’s no limit to how much money you can roll over at a time. Also, if you’re already 70-1⁄2, minimum required distributions are not eligible to be rolled over.
All of Millbury Savings Bank’s IRA accounts accept rollovers from 401(k) plans, as well as transfers from other IRAs. Be sure to ask a customer service representative for details.
*Check with your tax advisor.