Minster Bank. Bank Close. Go Far.
Open Menu

PERSONAL FINANCE

June 10, 2024

Changing Jobs? Know Your 401k Options

If you’ve lost or changed your job, you might wonder what to do with your 401(k) account. Here’s what you need to know:

What Am I Entitled To?

When you leave a job, you can get a distribution of your vested balance. This includes:

  • Your contributions (pre-tax, after-tax, and Roth)
  • Investment earnings on those contributions
  • Employer contributions that have vested according to your plan’s rules

Generally, you become fully vested in employer contributions after three years (cliff vesting) or gradually over six years (graded vesting). Some plans offer faster vesting, and once you reach the normal retirement age, you are fully vested. Check your plan’s vesting schedule in your summary plan description (SPD) or ask your plan administrator.

Don’t Spend It

It’s tempting to spend your 401(k) money, but unless you need it urgently, don’t. If you take a distribution, you’ll pay taxes on it and possibly a 10% early withdrawal penalty if you’re under 55. Instead, consider rolling it over.

Roll Over Options

If your balance is over $7,000 in 2024, you can:

  • Leave it in your current plan
  • Roll it over to an IRA
  • Roll it over to a new employer’s 401(k) plan

A direct rollover is better than a 60-day rollover because it avoids a 20% withholding on the taxable portion.

IRA vs. New Employer’s 401(k)

Assuming both options are available to you, there’s no right or wrong answer to this question. You need to weigh all of the factors, and make a decision based on your own needs and priorities. It’s best to have a professional assist you with this, since the decision you make may have significant consequences — both now and in the future.

Reasons to Roll Over to an IRA:

  • You generally have more investment choices with an IRA than with an employer’s 401(k) plan. You typically may freely move your money around to the various investments offered by your IRA trustee, and you may divide up your balance among as many of those investments as you want. By contrast, employer-sponsored plans may offer a limited menu of investments from which to choose.
  • You can freely allocate your IRA dollars among different IRA trustees/custodians. There’s no limit on how many direct, trustee-to-trustee IRA transfers you can do in a year. This gives you flexibility to change trustees often if you are dissatisfied with investment performance or customer service. It can also allow you to have IRA accounts with more than one institution for added diversification. With an employer’s plan, you can’t move the funds to a different trustee unless you leave your job and roll over the funds.
  • An IRA may give you more flexibility with distributions. Your distribution options in a 401(k) plan depend on the terms of that particular plan, and your options may be limited. However, with an IRA, the timing and amount of distributions are generally at your discretion (until you reach the age at which you must begin taking minimum distributions).
  • You can roll over (essentially “convert”) your 401(k) plan distribution to a Roth IRA. You’ll generally have to pay taxes on the amount you roll over (minus any after-tax contributions you’ve made), but any qualified distributions from the Roth IRA in the future will be tax free.

Reasons to Roll Over to a New Employer’s 401(k):

  • Many employer-sponsored plans have loan provisions. If you roll over your retirement funds to a new employer’s plan that permits loans, you may be able to borrow up to 50% of the amount you roll over if you need the money. You can’t borrow from an IRA — you can only access the money in an IRA by taking a distribution, which may be subject to income tax and penalties. (You can give yourself a short-term loan from an IRA by taking a distribution, and then rolling the dollars back to an IRA within 60 days; however, this move is permitted only once in any 12-month time period.)
  • Employer retirement plans generally provide greater creditor protection than IRAs. Most 401(k) plans receive unlimited protection from your creditors under federal law. Your creditors (with certain exceptions) cannot attach your plan funds to satisfy any of your debts and obligations, regardless of whether you’ve declared bankruptcy. In contrast, any amounts you roll over to a traditional or Roth IRA are generally protected under federal law only if you declare bankruptcy. Any creditor protection your IRA may receive in cases outside of bankruptcy will generally depend on the laws of your particular state. If you are concerned about asset protection, be sure to seek the assistance of a qualified professional.
  • You may be able to postpone required minimum distributions. For traditional IRAs, these distributions must begin by April 1 following the year you reach age 73 (75 for those who reach age 73 after December 31, 2032). However, if you work past that age and are still participating in your employer’s 401(k) plan, you can delay your first distribution from that plan until April 1 following the year of your retirement. (You also must own no more than 5% of the company.)
  • If your distribution includes Roth 401(k) contributions and earnings, you can roll those amounts over to either a Roth IRA or your new employer’s Roth 401(k) plan (if it accepts rollovers). If you roll the funds over to a Roth IRA, the Roth IRA holding period will determine when you can begin receiving tax-free qualified distributions from the IRA. So if you’re establishing a Roth IRA for the first time, your Roth 401(k) dollars will be subject to a brand new five-year holding period. On the other hand, if you roll the dollars over to your new employer’s Roth 401 (k) plan, your existing five-year holding period will carry over to the new plan. This may enable you to receive tax-free qualified distributions sooner.

Things to Consider

When evaluating whether to initiate a rollover always be sure to (1) ask about possible surrender charges that may be imposed by your employer plan, or new surrender charges that your IRA may impose, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.

What About Plan Loans?

In general, if you have an outstanding plan loan, you’ll need to pay it back, or the outstanding balance will be taxed as if it had been distributed to you in cash. If you can’t pay the loan back before you leave, you’ll still have 60 days to roll over the amount that’s been treated as a distribution to your IRA. Of course, you’ll need to come up with the dollars from other sources.

Understanding your 401(k) options is crucial for your financial future. If you’re unsure, consult a member of our Wealth team to help you make the best decision.

Categories


Close Form

Online Banking Login

Questions? How can we help?