A job departure is imminent. You may be wondering what to do with your 401(k) plan. A retirement plan that employers offer to their employees is called a 401(k). It enables you to put aside money for retirement by allocating a portion of your salary to the plan. Additionally, your company could match your contributions up to a predetermined proportion. You have several choices for your 401(k) plan when you leave your work.
In this article, we will explore the top 5 options for your 401(k) when leaving a job.
What is a 401(k)?
A 401(k) is a retirement plan sponsored by an employer. It allows employees to save for retirement by contributing a portion of their salary to the plan. Typically, before taxes are applied, the contributions are taken out of the employee’s paycheck. This means that the employee’s taxable income is decreased because the contributions are made with pre-tax money. Until they are withdrawn, the contributions and any returns on them accumulate tax-deferred.
Option 1: Leave it alone
You can choose to leave your 401(k) plan alone when you quit a job. This implies that you would keep the funds in the retirement plan of your former employer. If your 401(k) plan’s investment options and fees meet your needs, this option is a good fit. You can continue to oversee the performance of your account and manage your investments. However, your prior employer might demand maintenance fees, and you might not be allowed to make contributions to the plan any longer.
Option 2: Cash out
Another option for your 401(k) plan when leaving a job is to cash out. This means that you would withdraw the money from your plan and receive a check for the balance. This option may be tempting if you need the money immediately. However, it is not recommended since you will have to pay taxes and penalties on the withdrawal. The taxes and penalties can be substantial, reducing your retirement savings significantly. You should only consider this option if you have no other choice.
Option 3: Direct rollover to IRA or to your new employer’s plan
A third option for your 401(k) plan when leaving a job is to do a direct rollover to an Individual Retirement Account (IRA) or to your new employer’s plan. This means that you would transfer the money from your former employer’s plan to an IRA or to your new employer’s plan without incurring taxes or penalties. This option is suitable if you want to continue to save for retirement and have more investment options and control over your account. You can choose an IRA or a new employer’s plan that suits your investment goals and risk tolerance.
Option 4: Direct trustee-to-trustee transfer
A direct trustee-to-trustee transfer implies that you would transfer the money from your former employer’s plan to an IRA or to your new employer’s plan through a trustee-to-trustee transfer. This option is similar to a direct rollover, but the transfer is done between the trustees of the plans, not the account owner. This option ensures that the money is transferred safely and securely and does not trigger taxes or penalties.
Option 5: Indirect or 60-day rollover
An indirect or 60-day rollover means that you would receive a check for the balance of your plan and deposit it into an IRA or a new employer’s plan within 60 days. This option may be tempting since you have control over the money for 60 days, but it is not recommended. This is because if you fail to deposit the money into an IRA or a new employer’s plan within 60 days, you will have to pay taxes and penalties on the withdrawal.
Depending on your circumstances and retirement goals, each option has its advantages and disadvantages. That is why it’s also a good idea to consult a financial advisor to help you make an informed decision.
At Gainspoletti Financial Services, we offer time-tested advice on how to navigate through these options. We’re here for you when it comes to managing your 401(k) plan and making sure it’s as easy as possible for you to take care of business while you’re at your new job.
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401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 ½, may be subject to a 10% federal tax penalty.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax, and if taken prior to age 59 ½, may be subject to a 10% federal tax penalty.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Gainspoletti Financial Services and not necessarily those of Raymond James.