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How To Manage Your 401(k) During A Career Change

What should you do with your 401k if you decide to change jobs? Do you leave it alone, take it with you, or roll it over into another retirement plan? Regardless of the option you choose, your first objective should be to avoid paying taxes on your retirement nest egg for as long as possible.

You Can Take It With You

You have the option of withdrawing your 401(k) funds in a lump sum when leaving your employer, by simply asking the plan administrator to send you a check. It’s your money, and you’re free to use it however you wish – whether that means covering living expenses, making major purchases, or investing the proceeds elsewhere. The prospect of cashing out like this may tempt you, but it’s generally a very bad idea. Closing your 401(k) can significantly reduce your retirement savings – never a wise move unless you’re facing a financial emergency that leaves you with no other options.

Should you withdraw your 401(k) funds, you’ll owe federal (and possibly state) income taxes on the proceeds, and you may find that the distribution pushes you into a higher tax bracket. If you’re under age 59 ½, you’ll also pay a 10% premature distribution penalty – and since your employer is required to withhold 20% of your withdrawal for federal taxes, you may get less cash out of the account than you were anticipating.

You Can Leave It Alone

You have the option of simply leaving your retirement funds in your previous employer’s 401(k) plan when moving to a new job, where your investments will continue to grow tax-deferred. If your vested balance (your contributions to the plan, matching contributions from your employer, and the earnings on those contributions) is less than $5,000, however, you may be required to close the account when you leave the company. You may also have to withdraw your funds once you’ve reached the plan’s normal retirement age.

Leaving your retirement funds in your previous employer’s 401(k) plan may be a good idea if you’re happy with your investments, or if you’re required to work for your new employer for a certain length of time before you’re allowed to participate in their retirement plan. 

Do A Direct Rollover

You can transfer, or rollover, your 401(k) funds to your new employer’s retirement plan, provided that the plan rules allow for it. You can also transfer funds (with no maximum) to a traditional IRA account you already own, or open a new one. It’s also possible to rollover your non-Roth 401(k) funds to a Roth IRA, with the taxable portion of your distribution included in your income at the time of the rollover. If you’ve made Roth contributions to your 401(k) plan, you can only roll those funds over into another Roth 401(k) or Roth 403(b) plan, or to a Roth IRA.

The best way to transfer funds out of your previous employer’s retirement plan is to have the plan trustee or custodian transfer assets to the trustee or custodian of your new plan. Complete the necessary paperwork according to federal rollover rules, and this seamless process will allow your retirement funds to remain tax-deferred, with no withholding of federal income tax. In some instances, you might receive a check payable to the trustee or custodian of your retirement account, which is still considered a direct rollover. If this is the case, simply forward the check to the institution acting as trustee or custodian of your retirement account.

Do An Indirect Rollover

To do an indirect rollover, you have the distribution payment sent to you, then deposit the funds into your new retirement account within 60 days. Since you could theoretically use your retirement plan distribution for any purpose, your 401(k) plan is required to withhold 20% for federal income taxes on the taxable portion of your distribution. Unless you cover this 20% deficit with out-of-pocket funds when making your rollover deposit, this withholding will be considered a taxable distribution, subject to regular income tax and a 10% premature distribution penalty if you’re under age 59 ½. If you choose the indirect rollover option, deposit the funds within 60 days to avoid having the entire amount considered a taxable distribution.

Regardless of what you decide to do with your 401(k), you may wish to discuss the specifics of your situation with a tax professional and your plan administrator before determining how to best manage the funds in your retirement plan.

The information herein is general in nature and should not be considered insurance, legal or tax advice.  Please consult with an insurance legal or tax professional for additional information on specific situations.    

Investment advisory services provided by Werba Rubin Wealth Management, LLC (“Werba Rubin”). Securities transactions are offered through a non-affiliated entity, Loring Ward Securities Inc., member FINRA/SIPC. WR 16-045

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