Changing Jobs? Don’t Let Your 401(k) Slip Away
George M. Matthai


Today’s job market is more transitory than ever. And, as more and more individuals switch jobs, they begin to wonder what they should do with the money they have accumulated in their employer-sponsored retirement plans such as their 401(k) plans. The good news for 401(k) plan participants is that your retirement plan assets are very portable so you may be able to keep your existing 401(k) plan assets in a tax-deferred environment.

The trick is to resist the urge to use the monies. After tucking money away in your 401(k) for quite some time, you may be tempted to use it to treat yourself to a new car or some other indulgence. Because it could literally take years to replace your existing 401(k) funds, you should think carefully before prematurely taking money from your retirement savings.

A hasty withdrawal decision by someone under age 55 could easily wipe out a third of your 401(k) assets. If you decide you want a lump-sum withdrawal paid directly to you, the 401(k) plan trustee must withhold 20% for federal income tax and, if you do not attain age 55 prior to the end of the year in which you separate from service, the trustee must also withhold an additional 10% premature distribution penalty. So you will receive a net payout of 70 to 80% of your existing 401(k) plan account balance. After age 55, however, the premature distribution penalty is no longer imposed if your withdrawal is prompted by your separation from service with the employer sponsoring the plan.

Of course, if you choose to take a withdrawal, you may, within 60 days of the distribution, subsequently decide to deposit it into an IRA as a qualified rollover. However, for the withdrawal and re-contribution to be a tax neutral event, you would need to deposit the gross distribution amount into the IRA, which means you need to replace the withheld monies with funds from another resource such as your personal savings.

If you can resist the urge to take a withdrawal when you change jobs, you are one step closer to making a distribution decision that will preserve your hard-earned money. To be in the best position to make an informed decision, you should consider other options available for your existing 401(k) assets, such as:

• leave your assets in the 401(k) plan
• transfer your assets to a new employer’s 401(k) or retirement plan, or
• roll your assets into an IRA.

Leaving your assets in the 401(k) plan may not be your best option. It depends on your existing 401(k) plan’s provisions. Some plans have limited investment options for employees who have separated from service and some have restrictive distribution options. However, most plans do allow employees who separate from service to roll their 401(k) assets to a new employer’s 401(k) plan, or retirement plan, or to roll to an IRA.

Transferring your existing 401(k) assets to a new employer’s plan may be an option. To do so, you must first meet the eligibility requirements of your new employer’s plan. Additionally, the trustee on the new plan must agree to accept your assets, which may be a concern, especially if your existing 401(k) assets include shares of employer stock. Information on other considerations involved in transferring your existing 401(k) assets to your new employer’s 401(k) plan is available from your new employer.

A direct transfer to an IRA avoids the mandatory withholding of the 20% for income tax and the 10% for the premature distribution penalty, if applicable. Your 401(k) plan trustee may simply transfer your plan assets electronically or may cut a check payable to your IRA. Once in your IRA, the assets continue to accumulate tax-deferred. One of the more attractive aspects to rolling your existing 401(k) into an IRA is your control feature. Not only do you have more control over your investment options; but, you will also have more control over the timing and manner of your distributions.

Your 401(k) plan account balance represents your savings; therefore, it is important to make informed distribution decisions that will preserve your hard-earned money. To learn more about the portability of your 401(k) assets, or for more information on preserving your 401(k) assets and 401(k) retirement planning strategies based on your particular situation, please contact us for a complimentary consultation.