Don’t forget about your old 401(k) if you quit a job or were laid off
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Whether or not you leave your job by choice, don’t forget about your 401(k) plan.
as workers continue to quit their jobs At a high rate some companies are starting to lay off workers – incl AmazonAnd sales force And Goldman Sachs There’s a good chance that some departing workers will leave their employer-sponsored retirement plan.
Although not everyone has a 401(k) or similar workplace retirement plan, those who do may want to learn about what happens to their account when they leave a job and what options are available — and what aren’t.
You have three basic options for an old 401(k).
In general, you have several options for your old 401(k). You may be able to Leave it where it is, put it into your new workplace plan or individual retirement account, or cash it out—though experts generally caution against the third step.
Cashing out “is the least desirable option,” said Eric Amzalaj, a certified financial planner and owner of Peak Financial Planning in Canoga Park, California.
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For starters, he said, you’ll be faced with paying taxes on the distribution — unless it’s after-tax money you put on file Roth 401(k). With some exceptions, you’ll also typically pay a 10% tax penalty if you’re under 59, which is when withdrawals from 401(k)s and other retirement accounts can begin.
“If the size of the account is large, it may push the individual into a high tax bracket, causing the funds to be taxed at a higher, unfavorable rate,” Amzalaj said.
Keep track of money left in your previous employer’s 401(k)
Perhaps the easiest thing you can do is leave your retirement savings in your previous employer’s plan, if that’s allowed. Of course, you can no longer contribute to the plan. And you won’t be able to get a loan from this account like you can when you’re an active 401(k) employee.
However, while this may be the easiest immediate option if it is available, it could lead to more work in the future.
Basically, finding old 401(k) accounts can be difficult if you’ve lost track of them. while in Congress The legislation known as Secure 2.0enacted in December, includes a provision for a “lost and found” retirement account, and the Labor Department gets two years to create it. Some senior 401(k) plan administrators Fidelity Investments, Vanguard Group and Alight Solutions have also teamed up to provide lost and found.
Also, be aware that if your account is small enough, you may not be able to keep it with your previous employer even if you wanted to.
If the balance is between $1,000 and $5,000, your previous employer can transfer the amount to an IRA. (Secure 2.0 changed this upper limit to $7,000, effective for distributions made after 2023.)
If the balance is less than $1,000, the plan can cash you out—which could result in a tax bill and early withdrawal penalty.
Consider moving to a new workplace plan or IRA
Another option is to transfer the balance to another qualified retirement plan, such as a 401(k) at your new employer, assuming the plan allows it.
“The main advantage of this option is consolidation of your accounts and less tracking,” said Justin Rucci CFP, a consultant with Warren Street Wealth Advisors in Tustin, California.
You can also transfer it to an IRA account, which may provide more investment options – however It may also come with higher feeswhich can eat your nest eggs.
Be aware that if you have a Roth 401(k), it can only be transferred to another Roth account. This type of 401(k) and IRA involve after-tax contributions, which means you don’t get a tax break up front like you do with traditional 401(k) plans and IRAs.
However, Roth funds grow tax-free and are not taxed when qualified withdrawals are made in the future.
Watch out for 401(k) Exit Costs
Whatever you choose to do with your old workplace retirement account, be aware of some potential “exit costs” associated with it.
For example, while any money you put into your 401(k) is always yours, the same cannot be said for employer contributions.
Equity vesting tables – The length of time you must be with a company for their matching contributions to be 100% your shareholder – ranging from immediately to six years. Any uninvested amounts are usually forfeited when you leave your company.
Also, if you took out a loan from your 401(k) and didn’t pay it back when you left your company, there’s a good chance your plan required you to pay off the remaining balance fairly quickly. Otherwise, your account balance will be reduced by the amount owed — called “loan offset” — and considered a distribution.
In simple terms, unless you are able to find that amount and put it into a qualified retirement account by the next year’s tax filing deadline, it’s considered a distribution that may be taxable. And if you were less than 59C when leaving the job, you can pay a 10% penalty for early withdrawal.
About a third of employer plans allow former employees to continue paying the loan after they leave the company, according to Vanguard. This makes it useful to check your plan’s policy.
There may be reasons to avoid passing on an IRA
It’s worth talking to a financial advisor before moving your old 401(k). In addition to portfolio considerations such as investment options and Expensesthere may be planning consequences.
For example, there’s something called the 55 rule: If you leave your job on or after the year you turn 55, you can take penalty-free distributions from your current 401(k). If you transfer money to an IRA, you generally lose the ability to make use of the money before the age of 59½ without paying a penalty.
Additionally, if you are the spouse of someone who plans to transfer their 401(k) balance into an IRA, know that you will lose the right to be the sole heir to that money. With a workplace plan, the beneficiary must be you, the spouse, unless you sign a waiver that allows it to be someone else.
Once the money reaches a rolling IRA, the account owner can name anyone as a beneficiary without the spouse’s consent.