Let us say that you have worked at your current job for a number of years and you were fortunate to be with a firm that offered you a 401(k) plan. Now, however, a new opportunity arose and you are leaving your current job. What do with the funds you accrued in your 401(k) plan? This scenario is common, as employees stay in their jobs for shorter periods and are more comfortable moving to new companies.
When you change jobs, you have the option of cashing out your 401(k) fund balance, rolling it into an Individual Retirement Account (IRA), rolling it into your new company’s 401(k) plan (provided they have one), or leaving the balance in the current plan. It is not advised to cash your funds out since you will be taxed on the amount as income and, if you are under age 55, you will be penalized as well. That leaves three other options. Despite the convenience of leaving your funds in the current plans, many people choose a different route. Why is this?
Surprisingly, many plan administrators shy away from keeping non-current employees in their plans. In fact, a recent U.S. Government Accounting Office survey indicated a majority of plans surveyed were ambivalent about or averse to keeping past employees in their plan. In addition to such aversion, there is often complex paperwork and/or waiting periods required to reclassify your account status. This complex process dissuades some past employees from continuing with their 401(k) plan and, therefore, they choose a different path for their retirement account.
Rolling the funds into a current employer’s plan is contingent upon there being a plan in place. If one exists, there can still be complex hurdles involving paperwork and unusual timing issues. This complexity often dissuades people from taking this step.
A more common path for 401(k) funds is to roll them into an IRA. IRAs have been aggressively marketed in the past decades and many people include them in their retirement planning. Working with both your current 401(k) plan and the institution offering your IRA, you can initiate and complete the process in as short as a few hours. This simplicity is inviting and, additionally, you can begin to centralize your fund holdings with one company. This simplifies your future planning and paperwork issues. It’s advisable to let the two institutions handle the actual funds, thereby allowing you to avoid any potential taxation issues.
What to do with an existing 401(k) plan once you leave your job is an important decision. While simplifying the process and your plan is desirable, you also need to evaluate your financial goals. The ultimate decision on what to do with your funds will reflect where you currently are and where you want to be in regards to your retirement funding. Keep your eye on the prize, do your research, and the best choice becomes evident.
Source: U.S. News and World Report www.money.usnews.com