Are you heading for a new job? Don’t forget your 401(k) plan

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When you get a new job, there may be a lot of things you want to completely forget about your previous employer.

Just make sure your 401(k) plan isn’t one of them.

While you may have options on how to manage that retirement savings, there are situations where the decision is made for you if you don’t act — and it may not be in your best interest.

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“It’s best to deal with it during the first two months of this transition to a new job,” said Haley Tolitsky, certified financial planner at Cooke Capital in Wilmington, North Carolina.

As part of the so-called big quit, workers quit their jobs at near-record levels in search of better opportunities in a tight labor market. With an unemployment rate of 3.6%, companies have had to compete for talent by raising wages or expanding their hiring pool.

Nearly 4.4 million Americans quit their jobs in February, according to the latest data from the US Department of Labor. That’s about 100,000 more than in January and close to the record 4.5 million set in November.

While not everyone has a 401(k) plan or similar workplace retirement plan, those who do need to know what happens to their account when they leave a job and what the options – and no.

Here’s what you need to know.

Leave the money or move it?

One thing you can do is leave your retirement savings in your former employer’s plan, if permitted. Of course, you can no longer contribute to the plan or receive employer contributions.

However, while it may be the easiest immediate choice if available, it could lead to more work in the future.

Basically, finding old 401(k) accounts can be tricky if you lose track of them. There is, incidentally, legislation pending in Congress that would create a “lost and found” database to make it easier to locate lost accounts.

If you can avoid it, you don’t want to cash out your 401(k).

Catherine Hauer

Certified Financial Planner at Wilson David Investment Advisors

“It’s really common,” Tolitsky said. “People change jobs, they have life changes, they forget about it and 10 years later they don’t even know who [the 401(k)] was with or who the supplier was. »

Also be aware that if your balance is low enough, the plan might not allow you to stay there even if you want to. If the balance is less than $1,000, your plan may cash you out, which may result in a tax bill and penalty.

“If you can avoid it, you don’t want to cash in your 401(k),” said Kathryn Hauer, CFP at Wilson David Investment Advisors in Aiken, South Carolina. “Doing this with a traditional 401(k) means you’ll likely pay a 10% tax penalty.”

Your other option is to transfer the balance to another qualified retirement plan. This could include a 401(k) with your new employer — assuming the plan allows for it — or a rollover Individual Retirement Account.

Be aware that if you have a Roth 401(k), it can only be transferred to another Roth account. This type of 401(k) and IRA involve after-tax contributions, which means you don’t get tax relief like you do with 401(k) plans and traditional IRAs.

However, Roth money grows tax-free and not taxed when you make qualified withdrawals down the road.

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

Vesting timelines — the length of time you must stay with a company for its matching contributions to be 100% yours — range from immediate to six years. Any unearned amounts are generally forfeited when you leave your business.

Outstanding loans

Among 401(k) plans that allow participants to borrow money, about 13% of savers had a loan in their account in 2020 with an average of $10,400 owed, according to Vanguard research.

If you quit your job and haven’t repaid those borrowed funds, chances are your plan will require you to pay off the remaining balance fairly quickly. otherwise, your account balance will be reduced by the amount owing and treated as a distribution.

Simply put, unless you are able to find this amount and put it into an eligible retirement account, it is considered a taxable distribution. And, if you’re under 55 when you leave your job, you’ll pay a 10% early withdrawal penalty. Workers who leave their company when they reach this age are subject to special withdrawal rules for 401(k) plans — more details below.

If initially considered a distribution, you have until next year’s tax day to replace the loan amount – i.e. if you were to leave in 2022, you have until until April 15, 2023 to find the funds (or Oct. 15, 2023, if you file an extension). Prior to major tax law changes that took effect in 2018, participants only had 60 days.

According to Vanguard, about a third of employer plans allow former employees to continue repaying the loan after they leave the company. It’s worth checking your plan’s policy.

Reasons to take a break

There’s something called the rule of 55: if you quit in the year you turn 55 or later, you can receive penalty-free distributions from your current 401(k).

If you transfer the money 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 is considering transferring their 401(k) balance to an IRA, be aware 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 it to be someone else.

Once the money lands in the rolling IRA, the account holder can designate anyone as a beneficiary without their spouse’s consent.

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