Don't forget your old 401(k) if you leave a job or get laid off

Don’t forget your old 401(k) if you leave a job or get laid off

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Whether you leave your job by choice or not, don’t forget about your 401(k) plan.

As workers continue to quit their jobs at a rapid rate and some companies embark on layoffs, including Amazon, Salesforce and Goldman Sachs, there is a good chance that some workers who leave will leave behind a government-sponsored retirement plan. employer.

While not everyone has a 401(k) or similar workplace retirement plan, those who do may want to be familiar with what happens to their account when they leave a job and what the options are, and which ones don’t

You have three basic options for an old 401(k)

Generally speaking, you have several options for your old 401(k). you may be able to leave it where it is, put it in your new work plan or individual retirement account, or take it out in cash, although experts generally warn against the third move.

Withdrawing money “is the least desirable option,” said Eric Amzalag, certified financial planner and owner of Peak Financial Planning in Canoga Park, California.

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For starters, he said, he would have to pay taxes on the distribution, unless it’s after-tax money he put into a Roth 401(k). With a few exceptions, you’ll typically also pay a 10% tax penalty if you’re under age 59½, which is when withdrawals from 401(k)s and other retirement accounts can begin.

“If the size of the account is large, it could push the person into a higher tax bracket, which would cause the funds to be taxed at a higher, more disadvantageous rate,” Amzalag said.

Keep track of money left in a 401(k) from a previous employer

Perhaps the easiest thing to do is leave your retirement savings in your previous employer’s plan, if it’s allowed. Of course, you can no longer contribute to the plan. You also won’t be able to take a loan from that account like you can when you’re an active 401(k) employee.

However, while this might be the easiest immediate option if available, it could lead to more work down the road.

Basically, finding old 401(k) accounts can be tricky if you lose them. While Congressional legislation known as Secure 2.0 and signed into law in December includes a provision for a “lost and found” retirement account, the Labor Department has two years to create one. Some big 401(k) plan administrators—Fidelity Investments, Vanguard Group and Alight Solutions—have also teamed up to offer their own lost and found.

Also keep in mind that if your account is small enough, you may not be able to keep it with your former employer, even if you wanted to.

If the balance is between $1,000 and $5,000, your former employer can roll the amount over to an IRA. (Secure 2.0 changed that upper limit to $7,000, effective for distributions made after 2023.)

If the balance is less than $1,000, the plan may charge it, which can result in a tax bill and an early withdrawal penalty.

Consider a rollover to a new work plan or an IRA account

Another option is to transfer the balance to another qualified retirement plan, such as your new employer’s 401(k), assuming the plan allows it.

“The main advantage of this option is the consolidation of your accounts and less to keep track of,” said CFP Justin Rucci, an adviser at Warren Street Wealth Advisors in Tustin, California.

You can also roll it over to an IRA, which can provide more investment options, but can also result in higher fees, which can eat away at your savings.

Please note that if you have a Roth 401(k), it can only be rolled over to another Roth account. This type of 401(k) and IRA involves after-tax contributions, which means you don’t get an up-front tax break like you do with traditional 401(k) and IRA plans.

However, Roth money grows tax-free and is not taxed when you make qualified withdrawals in the future.

Beware of 401(k) ‘exit costs’

Whatever you choose to do with your old workplace retirement account, be aware of some of the potential “exit costs” associated with it.

For example, while the money you put into your 401(k) is always yours, the same cannot be said for employer contributions.

Vesting timelines (the length of time you must stay with a company for your matching contributions to be 100% yours) range from immediately to six years. Any unvested amounts are generally forfeited when you leave your company.

Also, if you’ve taken out a loan from your 401(k) and haven’t paid it off when you leave your company, your plan most likely requires you to pay off the remaining balance fairly quickly. Otherwise, your account balance will be reduced by the amount owed, called a “loan offset,” and it will be considered a distribution.

In simple terms, unless you can reach that amount and place it in a qualified retirement account before the following year’s tax filing deadline, it is considered a taxable distribution. And, if you’re under 59½ when you leave your job, you may pay a 10% early withdrawal penalty.

About a third of employer plans allow former employees to continue repaying the loan after leaving the company, according to Vanguard. This makes it worth reviewing your plan’s policy.

There may be reasons to avoid an IRA rollover

It pays to talk to a financial advisor before trading in your old 401(k). In addition to portfolio considerations such as investment options and fees, there may be planning implications.

For example, there’s something called the Rule of 55: If you leave your job in the year you turn 55 or later, you can take penalty-free distributions from your current 401(k). If you roll the money over to an IRA, you generally lose the ability to use the money before age 59½ without paying a penalty.

Also, if you are the spouse of someone who plans to transfer their 401(k) balance to an IRA, keep in mind that you would lose the right to be the sole heir to that money. With the workplace plan, the beneficiary must be you, the spouse, unless you sign a waiver allowing someone else to be.

Once the money arrives in the rollover IRA, the account owner can name anyone as a beneficiary without the consent of their spouse.

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