Change Jobs? Here’s What to Do With Your Retirement Account

When you change jobs, there is a whole lot going on. Keeping tabs on your 401(k) plan is too important to be forgotten. In order for your tax-deferred retirement savings to keep growing, you need to be informed when making decisions about your old plan. Make sure you avoid taking ANY lump-sum distributions. Not only will you pay taxes on those funds, but if you’re under 591/2, you will also pay a 10% penalty for early withdrawal. Instead, you have three options for your retirement account to preserve your tax dollars:

  1. Leave it Alone. One option is to leave your funds in the same plan. While you will no longer make any new contributions through your employer, the performance of the investment options might be beneficial to your overall portfolio. The downside is that means there is one more account you need to keep track of if you are participating in your new employer’s retirement plan.
  2. Roll it Into Your New Employer’s Plan. Before taking this step, it is best to look at the performance history of the new plan as compared to the old plan. While it may be easier to keep track of one account, the hassle could be worth additional investment earnings.
  3. Roll over into a New IRA. While this option could also mean keeping track of multiple accounts, there are virtually unlimited investment options using IRAs that could mean a very lucrative option for your overall portfolio.

If you decide that the roll-over option is best for your financial situation, make sure that you request a direct roll-over to the new plan – whether new 401(k) or IRA. If you receive a check, you need to make sure that check is deposited to a new retirement account within 60 days to avoid the tax and early withdrawal penalties.

The other note to consider is that if you do receive a check from your old plan, this will likely be less 20% for federal income tax withholding. If you don’t add additional funds to the total when depositing your check to the new account, you will also face the 10% penalty. The total deposit must be the gross amount of the value of the old account prior to its close.

Please keep in mind that the taxes withheld, whatever they are, may or may not be adequate to cover the additional taxes that would be owing due to the reporting of the additional income with all your other income.  In other words, you might be in a higher tax bracket in the year you receive the monies.  It is a good idea to verify your tax bracket and set aside the additional taxes that might be owing.

Again, whenever possible, it is best to avoid taking any distributions from your retirement plan when changing jobs. If you’re not sure which option is best for your financial well-being, give us a call and we will be happy to go over the options specific to your needs.


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