This is a guest post from Todd at The Working Dollar.
When you leave your job, you have several choices regarding your 401(k). These options are pretty much universal, meaning they apply to every 401(k) and to every job change situation. Your options are:
Cash the 401(k) plan and receive a full pay-out
I’ve listed this option first because it has the most serious ramifications.
First, if you take a full payout, you will have to pay taxes on the plan — usually 20% off the top when you take the money out, and a 10% penalty when you file your taxes if you are below the age of 59-1/2.
Second, if you have no other retirement plan and you take a pay-out on your 401(k), then you now have no more retirement money. You must start again from the beginning, and this puts you behind.
If you take a full payout but then decide you shouldn’t have done so, there’s still hope. The IRS has provided the 60-day rollover rule, which allows you take the money you withdrew from your 401(k) and roll it into an IRA within 60 days. You still pay taxes at the time you take the money out of the 401(k), so it’s your responsibility to find the cash to bring the IRA contribution to the level of your 401(k) withdrawal. However, when you file your tax return, you get a credit for the taxes on the 401(k) and for the 10% penalty. (Documentation is required.)
Roll the money to a new 401(k) plan
This option generally has no negative ramifications. Simply take the money from your old 401(k) plan and move it to the 401(k) plan at your new job. The money moves from one account to the other. There are no taxes or penalties involved. Best of all, you keep all your retirement money and can now add to it in the new 401(k) plan.
However, if there is a waiting period until you can participate in your new employer’s 401(k) plan, be sure you can let your money sit in the old 401(k) for the required time frame. If you’re not allowed to do this, all is not lost. You have another option.
Roll the money to an IRA
This option also usually has no negative ramifications. You can always take the money from your old 401(k) and roll it into an IRA. The transfer will occur without incurring taxes or penalties. Moreover, once the money moves into the IRA, you can continue to contribute to the IRA at your discretion. You’ll have more investment choices available, and the IRA will have fewer restrictions than your 401(k) plan.
You can also roll your 401(k) money into a Roth IRA, but you need to remember that a 401(k) plan is a pre-tax plan, and a Roth IRA is an after-tax plan. You will need to pay taxes if you move from a 401(k) to a Roth IRA, unless you are rolling after-tax money. Be sure to ask your 401(k) representative about this option for further details.
Leave the money in the 401(k) plan
This option has a few ramifications, but they aren’t serious. If you meet the minimum amount required to keep the money in your existing 401(k), then you can leave the money alone, perhaps giving you time to decide you decide what to do with it. Be sure you to find out what the minimum required amount is for your particular 401(k) plan. These minimums can range from $1000 to $5000. (Each plan is different.)
If you decide to leave the money in your existing 401(k), there are several things to consider. First, you will not be able to make additional contributions to the plan. Remember, a 401(k) is a payroll deducted plan; if you leave your job, there is no payroll from which to contribute. Second, you must keep tabs on the 401(k). The plan can change hands from one record keeper to another, and the onus is on you to track where the plan moves if this happens. Third, you typically cannot roll into a 401(k) plan if you are no longer working for the company. However, you will want to check the rules to see if this rule applies to your plan.
Conclusion
These are the choices for your 401(k) plan once you leave your current job. Be sure to research the options that apply to your situation. Remember that you are making a decision that will affect your retirement savings, affecting how much money you may have when you retire. Getting the facts will make this transition easier for you.
Note: If you’re faced with this situation, be sure to read the comments on this entry for additional discussion on the nuances involved.
This article is about Career, Choices, Investing, Retirement
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I have a 403B that has been sitting there since I left a job almost 5 years ago. I can still roll it into an IRA, right? Also, anyone have any recommendation on who to use for the rollover?
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Depends on what you are looking for…Vanguard has the lowest expense ratio, which is why I went with them. If you want to be able to meet someone face to face, go for one of the others like Fidelity. But compare the expense ratios, adn look for no load funds to find the best deals.
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Hello all! If you need help with rolling over or the transfer of your 401k/403b/457 or IRA, please feel free to let me know! Thanks!
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Lonnie & CoffeeGirl, there are plans out there that you can go into that have ZERO fees. Fidelity has great commercials, but you pay for them!
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mjhvball – This can be done, by way of a direct transfer. Please post a reply if you’d like more info.
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ageekymom- yes, you can do this. I’d love to help you get it done. Please reply with a post and we’ll get in touch somehow.
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I have a 401(k) plan now, but I plan to leave my company as soon as possible *unless* I can manage a promotion. My funds are arranged somewhat aggressively because I thought I was in it for the long haul, but if I likely have to rollover my 401(k) to an IRA in the near future, does that mean I should be planning for short-term gains instead?
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I have a question for tax professionals out there. I contributed to a 401(k) during the 4 months I worked for one company in 2008. I quit in April and went to work for a company that does not have a 401(k). I contributed less than $1500 to the 401(k) while I worked for the first company. Now I want to invest more money into an IRA (I rolled over the 401(k) into an IRA).
My question is this: Can I deduct the additional amount I will put into the IRA on my 2008 taxes? Let’s say I put it another $3000. Can I deduct that amount in addition to the amount I put into the 401(k)?
Tax law says that there is a phase-out for IRA deduction if I was covered by a 401(k) plan at any time during this tax year. My AGI will be way over the phase-out amount. However, I was not employed the entire year and contributed less than $5000 into the 401(k). So, can I still deduct any additional amount or is the tax law simply unfair to the ones who quit the job early in the year? Heck, if I only worked one day in 2008 and contributed $1 to the 401(k), it would make no sense not to allow me to contribute to the IRA and be able to deduct that amount.
Any thoughts on this subject are welcome. Thank you.
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Is it generally easy to find out how expensive a 401k is? Both my wife and I have 401k funds from previous jobs. The management fees seem like a good factor in deciding whether to leave them there or roll to an IRA.
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Alex:
There are products out there that are available to you that do not have fees attached. In the market today, piece of mind is a good thing. In addition to the zero fees, you can find a product that will give you a bonus to get you going. I’d love to answer any questions you may have. Reply to the post and we’ll get in touch. Thanks!
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So I am quitting my job to move back to my home state/city. I don’t have another full-time job lined up back home, except waitressing until I find something full-time.
If I leave my 401K as is, with this economy, I feel like by not contributing money to the account (which I would not be doing) my money will keep dwindling more than it already has. Currently I am vested about $5100 into my account and I am 26 years old. I have only been working 3 years.
Any advice on what I should do??
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pghfan — it’s almost always best to roll from a 401(k) into an IRA. Just make sure you pick a (discount, probably online) broker that will handle your IRA without periodic fees, that offers the funds you want to invest in, and that you trust a bit. I don’t know what your situation will be, but in general you might as well maintain the flexibility of an IRA; that’s a decent amount of money and quite a few brokers will be happy to hold it for you without fees.
The problem with keeping the money in the 401(k) is that it’s essentially out of your control.
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pgfan: if you’d like to explore your available options, please shoot me a note @ info@matchplayservices.com There are a few IRA’s available now that do offer a bonus on top of your rolled over funds. Fees are always extremely important to realize. Please let me know if I can help! Thanks, Nick
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Rollover Guy, you wrote:
“There are products out there that are available to you that do not have fees attached. In the market today, piece of mind is a good thing. In addition to the zero fees, you can find a product that will give you a bonus to get you going.”
This is completely untrue. I assume you are speaking of an annuity which have optional riders that provide a bonus. That rider cost money. The cost of the bonus is in addition to the base fees of the annuity.
Am I missing something?
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Wm.Tanksley in #62 says:
The problem with keeping the money in the 401(k) is that it’s essentially out of your control.
I disagree. Beyond the inability to make further contributions, a 401(k) is still self-directed. Since leaving my job in April 2008, I still monitor the account and have rebalanced at the first of the year, to take advantage of the lower NAVs. Good move, because the values are on the way back up, and I stand to have a higher balance when the funds regain the previous NAVs.
If you’ve done your homework and made sound investment choices, why move the money–if the employer allows you to let it stay put–and be subjected to fees and high investment minimums?
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@Shin I also have funds sitting in my past employer’s 401k account. It gets auto-rebalanced. My thinking has been the same as yours. Why move it?
My fear is that I don’t really know what the fees are for 401k accounts there versus for example TIAA-CREF at my new employer. I wonder if there’s a huge difference. I suppose it’s on me to find out.
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Shin & Alex: You guys might want to investigate the fees associated with those 401k accounts, because you will likely find that they are very high, and they are very likely higher than what you would pay elsewhere, especially if you switched to ETFs.
Shin: when people say that you have little control over a 401k, what they mean is that your (former) employer has picked the very few funds that will be available to you, and that’s all you can choose from. You can’t choose from the many thousands of ETFs or traditional retail mutual funds that are available. In that sense, you have little control over your retirement money.
Now, if you don’t care about the fees, and you don’t care about the limited selection, then, sure, I guess there’s no real reason to move the money. For me, I care about the fees, and in my situations I always found the selection of funds to be sub-par. As such, I have never left money in a former employer’s 401k plan.
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Yes, lack of choice with employers making less than wonderful choices because they don’t take the time to make wonderful choices.
As an investment professional I run into another problem about twice a year. A new client with an old 401(k) with a small employer who’s gone out of business. The employee then tries to move funds from this employer’s 401(k) only to discover they have to get that employer’s signature to get the funds released. The trouble is finding the prior employer and then pinning them down to sign the form. The longest it’s taken me to get that form signed is six months.
Imagine needing the money for one reason or another. Do you want to deal with having to find those folk to access your own money? That’s the more important control to me. Now there is basically no one between me an my money.
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Good comments everyone. Another question: I hear this statement every once in a while but I’m not sure what to make of it — “If you move your funds you are locking in your losses.”
As long as I keep track of the total amount of contributions to see my personal ROI what does it matter where the funds are…
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Alex, here’s what I think of that statement:
If you exit the market, you are locking in your losses. If you merely change your investments, the you aren’t really locking in your losses: you are trading one low investment for another low investment.
Put another way: I think it’s foolish to continue to own an investment just because you owned it in the past – that’s nothing but inertia. A person needs to own investments that are appropriate for his current situation, not for a situation from his past.
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Jack and Daniel:
Under normal circumstances I might agree with you. However, my former employer is a major bank with its own investment services.
I have two stock funds (40%/40%) and a cash fund (20%). I did a fair amount of research when I selected the funds, and have not been disappointed. I’m just sorry that I couldn’t continue to contribute when the NAVs were way down. Since my contribution amount was modest ($50 a month) because I was only working part time, my contributions had what amounted to a 100% employer match. In fact, my balance is much higher than those of full-time employees who have been there three to five times longer than I was. Between employer matches on contributions and earnings, I have nearly a 100% ROI on my $4,500 contribution, and the account is not yet at its previous level. I know it’s not much, but since it ain’t broke, I have no plans to fix it.
I also have a Roth IRA with Vanguard, but the threshholds for non-institutional investing are pretty high. Also, I must pay $35.00 for each trade, and Vanguard doesn’t match my earnings, as does the bank. Between the two accounts, I have five diversified funds.
I will, however, take your words under advisement as they pertain to smaller employers. These things are good to know.
Alex:
Do you have any online access? You should be able to get info on each fund included in the plan. Call your plan administrator and ask to have that info sent to you.
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Before you make a 401k rollover do not forget to consult with a financial officer or an investment companies to check your status and do get information whether your rollover would incur any tax or penalties.
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I just give my company my 2 week notice. I need my 401k, but they told me that they do not allow me to cash it out for 1 year. Is that normal or legal. I relly need this money to survive.
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The best thing to do is ask an IRA provider or two; I’ll bet you’ll find one quickly. You’re right to think of minimum deposit; also look for zero fees. You might start by looking at some online comparisons, such as consumersearch.com.
I don’t think you can combine 401(k)s from different people.
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