Changing jobs can be stressful. You have old projects to finish and new responsibilities to learn. But when you pack up your personal belongings and move to your next place of employment, don't forget about your retirement account.
The money you've put in is yours to keep, but you may not know what to do with it. We're here to help you understand your options and continue preparing for your future.
Roll over to an IRA
Employer plans are designed to meet the needs of many people, not just yours. But fortunately, you don't have to be tied to a former employer's plan.
You can rollover your funds directly from your previous employer's 401(k) into an IRA. By completing a direct rollover, you can avoid the mandatory 20% federal income tax withholding.
A rollover to an IRA may be a good idea for you if you want to have more control over your retirement assets. Additionally, this option can simplify your retirement planning by having all your investments with one financial provider.
Leave your money with your previous employer
The easiest thing to do may be to leave your assets in your previous employer's retirement plan, but there are some details you'll want to consider before choosing this option.
Generally, you're only able to leave your money in your previous employer's plan if your account balance is over $5,000. If you have $5,000 or less, you may be required to take a full distribution. This can be in the form of a rollover. If you take the distribution in cash, you may be subject to tax and penalties.
Also, if you leave your money in your former employer's plan, you'll be limited to that plan's investment choices and payout options, which may be more limited than if you rolled the money over into an IRA. Plus, you'll no longer be able to make contributions or take a loan, in most cases. And you may have to pay extra service or administrative fees, along with the possibility of having transaction limits imposed.
If you decide to leave your retirement savings with a previous employer, be sure to keep your contact information up-to-date so you'll continue to receive statements and other pertinent information.
Roll over to your new employer's plan
You may be able to move your assets from your former employer's plan directly into your new employer's plan. This direct rollover allows your money to remain invested in a tax-deferred plan, and you incur no taxes or penalties for the move.
Before you make this decision, you'll want to review the investment choices and flexibility in your new plan. Options and withdrawals may be more limited than your previous plan. In addition, you may have to wait a year or more to be eligible to participate.
Cash out of your old plan
You don't have to wait until you retire to access the money in your retirement plan. It's yours, and cashing out will provide you with a lump-sum cash distribution in the form of a check payable directly to you. But there are several reasons this may not be the best option for you.
If you cash out of your old plan, you will deplete your retirement savings account and will need to start over again. Also, you won't receive the balance of your account. Your employer will be required to withhold 20 percent for federal income tax purposes. If you are in a higher tax bracket, you may owe more tax. You may also have to pay a 10% tax penalty for making a withdrawal from a 401(k) before age 59 1/2. If you leave your company at age 55 or older, the 10% penalty may not apply.
Cashing out is rarely a good choice, and we highly recommend you consult with your tax adviser before doing so. In most cases, you'll receive far less than if you'd left the money invested until retirement.
Keep an eye on the future
Remember, saving and planning are key to a comfortable retirement. Whatever you choose to do with your 401(k) when you change jobs, let us help you ensure your decision is in line with your retirement goals.
Neither State Farm™ nor its agents provide tax or legal advice.
Prior to rolling over assets from an employer-sponsored retirement plan into an IRA, it's important that customers understand their options and do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees, and any potential penalties.