401(k)Leaving one job and starting another is often exciting. As a new hire, you may be inundated with meeting new co-workers, figuring out the coffee situation, understanding expectations, demonstrating your value, and completing form after form.

Often, people who are starting new jobs forget about the workplace retirement plan accounts they’ve left behind with a previous employer. If you’re one of them, it’s a good idea to give that account some thought. Generally, there are four ways to manage workplace retirement savings. You can:

  1. Leave the money in the former employer’s plan. If you leave the money behind, any growth will continue to be tax-deferred or tax-free, depending on whether you made Traditional or Roth plan contributions. However, if the plan has a minimum balance requirement, accounts with less than $5,000 may be transferred to an IRA and accounts with less than $1,000 may be cashed out, creating a tax consequence.
  2. Roll the money into your new employer’s retirement plan. It may be helpful to have all of your qualified retirement savings in one place. If your new employer’s plan accepts rollovers without too long a wait, this may be an option. Many people fail to take this option because completing the paperwork and coordinating the process can be challenging.
  3. Roll plan assets into an IRA. Former plan participants may choose to rollover their 401(k) plan savings to a Traditional or Roth IRA. Typically, they can move Traditional plan assets to Traditional IRAs, Roth plan assets to Roth IRAs, or Traditional plan assets to Roth IRAs. If they choose the latter, there will be tax consequences. It’s important to understand IRA assets are typically only protected in the case of bankruptcy, while 401(k) plan assets are protected from all creditors, in general.
  4. Take a cash distribution. You also can choose to have the savings you’ve accumulated distributed as cash. While this gives you immediate access to the money, Traditional contributions and Roth earnings are taxable, and 20 percent may be withheld for tax purposes. Also, participants typically owe a 10 percent penalty tax, if they are younger than age 59½. Roth contributions may be exempted if certain criteria are met.*

If you are changing jobs, or you’ve left retirement savings behind with a former employer, and would like to discuss how to manage those assets, please give us a call. 401(k) plan savings are an important part of many retirement plans. Both qualified retirement plans and IRAs typically involve fees, expenses, and services that should be compared when considering a qualified plan rollover.

* Generally, Roth IRA contributions are exempt after the account is at least five years old and the account owner is age 59½.

Weekly Focus – Think About It

“I offered a definition of bubble that I thought represents the term’s best use: A situation in which news of price increases spurs investor enthusiasm which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase and bringing in a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”
–Robert Shiller, American Nobel Laureate and Professor of Economics [14]

Sources:

http://www.prudential.com/media/managed/Small_Cashout_Rollovers_PruPA.pdf
https://www.dol.gov/sites/default/files/ebsa/about-ebsa/about-us/erisa-advisory-council/2016-participant-plan-transfers-and-account-consolidation-for-the-advancement-of-lifetime-plan-participation.pdf
http://www.finra.org/investors/401k-rollovers
https://www.kiplinger.com/article/retirement/T032-C000-S002-pros-and-cons-of-rolling-your-401-k-into-an-ira.html
https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/rollover_ira/401k_rollover_options
https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2013/shiller-lecture.pdf (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/01-08-18_RobertShiller-Speculative_Asset_Prices-Footnote_11.pdf)