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If you’re one of the many workers hoping to find a better job elsewhere, be sure to pay attention to the 401 (k) plan account you leave behind.
According to a recent Bankrate survey, around 55% of workers say they will look for a new job next year. Called the ‘big resignation,’ the hunt for greener pastures comes more than a year after the start of the Covid pandemic, and for many, working from home – some of them seeking greater flexibility and higher wages.
While not all employees have a 401 (k) or similar pension plan, they need to know what happens to their account when they leave their job and what the options are – and don’t.
“I know it can be a stressful job change, but don’t forget your 401 (k),” said certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
Here is what you need to know.
First, the outstanding debt
Of the 401 (k) plans that allow participants to borrow money, about 13% of savers have a loan in their account, according to Vanguard Research. The average loan balance is approximately $ 10,400.
If you quit your job and still have arrears, chances are your plan will require you to pay off the balance sooner; Otherwise, your account balance will be reduced by the amount due and will be considered a distribution.
Simply put, unless you can find that amount and put it into a qualifying retirement account, this is a distribution that may be taxable. And, if you’re under 55 when you quit your job, you’ll have to pay a 10% early withdrawal penalty. (Employees who leave their company when they reach this age are subject to special withdrawal rules for 401 (k) plans – more information below.)
If this is initially considered a distribution, you have until tax day of the following year to replace the loan amount, i.e. if you want to leave in 2021, you have until the 15th. April 2022 to find the money. (or October). 15, 2022, if you file an extension). Before the major changes in tax law that came into effect in 2018, participants only had 60 days.
According to Vanguard, about a third of the plans allow their former employees to continue repaying their loans even after leaving the company. It is worth considering your plan’s policy.
Leave the money or transfer it?
Your first option for managing your retirement savings is to leave it in your former employer’s plan, if allowed. Of course, you can no longer contribute to the plan or receive compensation from the employer.
While this may be the easiest immediate option, it could lead to more work in the future.
“The risk is you’ll forget it down the road,” said Will Hansen, executive director of the Planning Sponsors Council of America.
Basically, finding old 401 (k) accounts can be difficult if you lose track of them. (Additionally, there is legislation pending in Congress that would create a “lost and found” database to help locate lost accounts.)
Also be aware that if your balance is very low, the plan may not allow you to stay there even if you want to.
“If the balance is between $ 1,000 and $ 5,000, the plan can transfer funds to a [individual retirement account] On behalf of the person, ”said Hansen. “If it’s less than $ 1,000, they can cash you.
“It depends on the plan.
Your other option is to transfer the balance to another qualifying pension plan. This can include a 401 (k) with your new employer – assuming renewals from other plans are accepted – or an IRA.
Keep in mind that if you have a Roth 401 (k) it can only be transferred to another Roth account. These types of 401 (k) and IRAs include after-tax contributions, which means you don’t get an initial tax break with traditional 401 (k) plans and IRAs. But Roth’s money grows tax-free and isn’t taxed when you make qualifying withdrawals down the road.
If you decide to transfer your retirement savings, you must perform a trustee-to-trustee rollover, where the transfer is sent directly to the new 401 (k) plan or to the IRA custodian.
Also, while all the money you put in your 401 (k) is still yours, the same is not true of employer contributions.
Acquisition timeline – The length of time you must be 100% yours for a business matching contribution – ranges from one year to six years. Any uninvested money is usually wasted when you leave your business.
purpose of stay
The Rule of 55: If you quit your job or turn 55 later in the year, you can receive distributions without penalty from your 401 (k).
If you transfer money to an IRA, you lose the ability to withdraw money before age 59, the standard age at which you can usually make withdrawals from retirement accounts without paying penalties.
Also, if you are the spouse of someone who is planning to transfer their 401 (k) balance to an IRA, be aware that you will lose the right to be the sole heir of that money. With a workplace plan, the beneficiary must be you, the spouse, unless you sign an exemption allowing someone else to be there.
Once the money goes into a rolling IRA, the account owner can name a beneficiary to anyone without their spouse’s consent.