5 Things to Consider with Your 401(k) When You Change Jobs

In today’s dynamic job market, it’s not uncommon for people to change jobs several times throughout their careers. 

With each job transition comes a new set of considerations, especially when it comes to your 401(k).

So, what do you do with your 401(k) when you change jobs?

If you have been taking advantage of your employer’s retirement plan, there are a few things you need to consider about your 401(k) before you change jobs. 

#1 You May Not Be Able to Take All of Your 401(k) Savings with You

Before quitting your job and starting a new one, understand that you may not be able to take all of your 401(k) savings with you. 

It all comes down to your plan’s vesting schedule. 

If you leave your job before you are fully vested, you may lose out on the employee match you worked so hard for. 

Vesting means ownership, and while you own what you contribute, the amount of employer matching contributions you can take with you depends on the vesting schedule. 

Some employees are immediately vested, while others must stay with the company for a certain period before owning the employer match contributions.

[Related Read: Why the Vesting Schedule Is More Important Now Than Ever Before]

#2 Don’t Cash It Out

This is a costly option we advise against because you will face penalties and pay taxes for cashing out before age 59½. 

If your 401(k) balance is low, your company may send you a check when you leave your current job.  

This is referred to as an indirect 401(k) rollover – and if you do NOT follow the guidelines, you may end up losing a chunk of your savings. 

Here’s how this works… 

20% taxes are withheld from every indirect rollover – whether you plan to roll over the funds or use the money to pay off debt or make a purchase.

The IRS mandates that your 401(k) custodian withhold this amount – so you get a check mailed to you, minus the 20% taxes. 

After you receive the check, you are required to put those funds – along with the missing 20% – in a new retirement account within 60 days.

You will be able to recover the withheld taxes when you file your tax return, but to complete the rollover, you need to produce that extra cash.

If you fail to do so by the 60-day deadline, your distribution will be taxed as ordinary income and subject to a 10% early withdrawal penalty if you are under the age of 59½.

This means, if you miss the 60-day deadline or decide to cash the check, you may be forced to pay a 10% penalty in addition to the 20% tax.

Let’s say you do an indirect rollover of your $10,000 total 401(k) balance before age 59½ – and you miss the 60-day deadline to roll over your funds. You will have 20% withheld in taxes along with a 10% penalty for early withdrawal. 

This means that you might only keep $7,000 of your original $10,000 401(k) balance – depending on your tax bracket.

You will face steep penalties if you cash out your 401(k) instead of rolling over the money.

[Related Read: Avoid These 4 Irreversible and Costly 401(k) Rollover Mistakes]

#3 You May Have to Pay Penalties

We already mentioned indirect rollovers, but there is another type – direct.

A 401(k) direct rollover is when the transaction occurs directly between the custodian of your old 401(k) plan and the custodian of your new 401(k) or IRA. 

You never actually receive the funds yourself or have control of them, so a trustee-to-trustee transfer is not treated as a taxable distribution. 

You can roll over your old 401(k) directly into your new 401(k), IRA, Roth IRA, or annuity.

There are no penalties or taxes that must be paid with a direct 401(k) rollover. 

In contrast, an indirect rollover puts you in charge. Your former company will send you a distribution check, which you are required to deposit into your new 401(k) plan or IRA.

Again, you are required to put those funds in a new retirement account within 60 days.

And, unlike the direct rollover, 20% taxes are withheld from every indirect rollover.

If you fail to put the funds in a new retirement account by the 60-day deadline, your distribution check will be taxed as ordinary income and subject to a 10% early withdrawal penalty if you are under the age of 59½.

[Related Read: The #1 401(k) Rollover Mistake – Avoid This at All Costs]

#4 You May Not Want to Roll It Over

If you roll over too soon, it may not be in your best interest.

Especially if you are 55 or older. 

If you wait to roll over your money and leave it in your 401(k), you may be able to avoid penalties with the “over 55 rule.”

The “over 55 rule” states that if you are 55 years old or older during the calendar year when you leave your job, you are allowed to take penalty-free withdrawals from the 401(k) plan.

While you will still have to pay taxes on the withdrawals, you won’t have to pay penalties.

#5 Get Professional Help

It’s always a smart idea to seek wise counsel regarding changing jobs.

The same is true when it comes to changing retirement accounts.

Before you make any big decisions that will affect your financial future, speak with a financial advisor.

You don’t want to miss out on employer matching contributions because you misunderstand the vesting schedule or make a costly rollover mistake that hurts your retirement fund.

Consult with the experts to make the best decision for your financial future.

Have questions about rolling over your 401(k)? Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors.

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