Due to the increase in company downsizing financial institutions are seeing an increase in 401k IRA activity.
When you are downsized or leave a job for other reasons, you have four options on handling your 401k account balance.
You can leave it with your prior employer, cash out your 401k retirement account, roll over the account balance to an Individual Retirement Account or roll over the balance to your new employer’s 401k plan. All four options have different consequences. Let’s look at those consequences.
4 Ways To Handle Your 401k Retirement Account:
Option #1 – Leave your balance with prior employer.
- You may leave your 401k investment balance with your prior employer if your account balance meets the minimum threshold set up by the IRS.
- The IRS minimum account threshold is $5,000.
- If your 401k account balance is below $5,000, your prior employer can force you to roll your account out of the plan.
- If your account balance is above $5,000 leaving it with your prior employer is okay if you like the variety of investments offered in the 401k retirement plan and you feel comfortable with the administration, management and the services provided.
- Make sure you are still eligible for all of the same services once you leave the job.
- Make sure the old employer’s plan does not charge fees for former employees to remain in the 401k plan.
- Keep in mind that you likely have less control.
- You cannot take a 401k loan on monies in an old employer’s plan.
- The 401k investments in a 401k plan are often selected by the employer, so you have less choice.
- The 401k retirement plan may have a smaller core lineup of investment choices.
- Money left behind in an old employer’s 401k plan is often forgotten.
Option #2 – Cashing out your 401k retirement account balance.
- Cashing out is the worst options of all four.
- Cashing out is very expensive and not worth it.
- If you cash out your 401k account, you will be immediately taxed on the account balance.
- If you are under age 59 1/2, you will also be subject to a 10% early withdrawal penalty.
Option #3 – Rollover to your new employer’s 401k retirement plan.
- A 401k rollover to your new employers plan is an easy option.
- First, find out when you are eligible to participate in the new plan.
- You may want to become eligible to participant in the new plan before rolling over monies from the old plan.
- Find out what the investment choices will be, do you like the variety better than your old employer’s 401k plan.
- Find out about the fees, are they lower?
- Is the new employers vesting schedule better than the old 401k plan?
- You can generally take out a 401k loan out against the balance of your new account.
- If you decide to rollover your 401k balance to your new employers 401k plan, be sure that the rollover check is not made out to you personally.
- Make sure the 401k rollover is a Direct Transfer or Trustee-to-Trustee Transfer.
- A Direct Transfer or Trustee-to-Trustee transfer is one where the financial institutions pass the money between themselves without you ever taking possession of the money.
- If you take possession of 401k rollover money and do not redeposit into a qualified retirement plan within 60 days, you will be taxed and pay tax penalties if you are under age 59 1/2.
- Once a 401k rollover is completed, you cannot change your mind and put the money back.
Option #4 – Rollover to an Individual Retirement Account.
- IRA’s can have great investment flexibility than 401k’s.
- You usually have a greater variety of investments to choose from.
- A 401k IRA rollover is the way to make an IRA transfer out of the 401k plan without being taxed or paying tax penalties.
- If you do decide to transfer your account balance out of the 401k to an IRA fund, you need to first complete an IRA transfer form.
- You may be able to obtain this form from your 401k plan administrator.
- The plan administrator may direct you to their online 401k program.
- But sometimes the plan administrator may direct you to the financial institution that is receiving the IRA transfer.
- The receiving financial entity has to provide their own proprietary IRA form.
A 401k IRA rollover is commonly used if you become unemployed after a downsizing and you do not want to leave your money in your former employers’ 401k. You can keep your 401k account as is – but at least you know that you have the option to transfer out of the plan if you so desire.