When you leave a job, especially if you have a 401(k) retirement savings account with that employer, there are several factors to consider regarding the impact on your 401(k). Here are some key points to keep in mind:
- Vesting: Check the vesting schedule of your 401(k) plan. Vesting refers to the ownership of employer contributions to your account. If you’re not fully vested when you leave the job, you may forfeit a portion of the employer contributions. Your own contributions and any earnings on them are always yours to keep.
- Distribution Options:
- Leave it in the Plan: Some employers allow you to keep your 401(k) funds in their plan, even after you’ve left the company. This can be a good option if the plan has low fees and good investment options.
- Roll Over to an IRA: You can roll over your 401(k) funds into an Individual Retirement Account (IRA). This gives you more control over your investments and can simplify your overall financial picture if you have multiple retirement accounts.
- Tax Implications:
- Direct Rollover: If you decide to move your 401(k) funds to an IRA or another employer’s plan, opt for a direct rollover to avoid any tax withholding. This means the funds are transferred directly from your 401(k) to the new account without passing through your hands.
- 60-Day Rollover: If you receive the funds directly (as a check, for example), you have 60 days to roll them over into another retirement account to avoid taxes and penalties. However, if you miss this deadline, the distribution may be subject to income tax and a 10% early withdrawal penalty if you’re under age 59½.
- Investment Strategy:
- Review and Adjust: Leaving a job is a good time to review your investment strategy. You may want to adjust your asset allocation or choose different investments based on your current financial situation and retirement goals.
- Understand Fees:
- Review Fees: Some 401(k) plans may have administrative fees that are covered by your employer while you’re employed. After leaving, you might be responsible for these fees. Understand the fee structure of your plan and consider if it makes sense to keep your money there.
- Access to Funds:
- Penalties for Early Withdrawal: If you’re under 59½ and withdraw money from your 401(k), you’ll generally incur a 10% early withdrawal penalty in addition to any applicable income taxes. There are some exceptions to this rule, such as certain hardship withdrawals.
Before making any decisions, it’s advisable to consult with Matthew Jennings, JD, MBA, EA, RFC®, CEP®, CES™, aka Tax King Matt. He can provide personalized advice based on your specific financial situation and goals.