Thinking about Changing Jobs?Oct 04, 2021 07:29AM ● By Griggers Wealth Management
If you are considering changing jobs, you need to know your options regarding your employer’s qualified retirement plan. Before you examine your options, there are two factors many people fail to look at before moving forward. The first is an outstanding loan on the plan. Once you leave employment with the company, the loan is considered outstanding and the money will be considered withdrawn from the account—bringing taxes no matter your age and a penalty of 10% if under 59 ½. To avoid this issue, pay off your loan before terminating employment. The second factor is the vesting schedule on the current plan. Many plans have a 5-year vesting schedule with 20% being vested each year and all of it being vested at the end of 5 years. If you are close to one of the anniversaries, it may be to your benefit to negotiate a later start date with the new job. Imagine losing 20% of the monies contributed by the employer due to not knowing the vesting schedule—a painful lesson.
Once you have turned in your resignation, you have four options concerning your qualified retirement plan. Each has its own advantages and disadvantages, and plans are not necessarily all the same. Your company may have its own little differences that make one option better than the others.
The first choice is to leave the funds at your previous employer. If you are unsure of what you want to do with the money, there may be some benefit to leaving the funds where they are. The monies will continue to grow tax-deferred, and you can make a decision at a later date to roll them over to an IRA or to your new employer’s plan.
The second choice is to take the cash in lump sum. This option exposes the monies to income taxes and will require them to be paid. There is also the additional 10% penalty if you are under age 59 ½. There are few exceptions to this rule. The majority of the time, this is the most expensive choice. The law requires that the former employer withhold 20% of the taxable portion of the lump sum for federal income taxes. Many times, this is not sufficient to cover the taxes owed and the remainder will be due on April 15th of the following year. The tax burden and the penalty take much of your retirement money.
The third choice is to Rollover or transfer within 60 days. If you receive a cash or lump sum distribution, you have 60 days in which to transfer the funds to either a rollover IRA or your new 401(k) plan at your new job. If you fail to transfer the funds within the 60 days, the total amount will be taxable to you in the year it was withdrawn. And if you are under 59 ½, you will owe the 10% penalty on the distributions unless there is an exception. Successfully rolling the funds into an IRA or into your new 401(k) keeps them growing tax-deferred and out of taxable income for the year.
The fourth choice is to make a direct transfer. The distribution can be transferred from the current custodian of your 401(k) plan to the new custodian of your new 401(k) plan or rollover IRA. Since you do not receive the funds, there is no 20% withholding. If your plan has Roth contributions, you will want to make sure that you have a Roth account to move those funds into. You do not want to mix the tax-deductible funds with your non-tax-deductible funds. It could cause all of them to be taxable since you may not be able to separate the amounts years in the future. Each company that has a 401(k) plan will give you a list of your options for your qualified retirement plan. Please read it carefully and make sure you know all your options. If you are unsure of your options, ask a qualified investment advisor to help you understand the rules of the game.
Billy Griggers, CLU ChFC
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.