Whether you’re making a career change or you've recently been laid off, your retirement plan assets may be at the bottom of your to-do list. However, moving those funds is an incredibly important decision that must be well-thought-out. When leaving an employer, there are typically three workable opportunities to continue the growth of your retirement funds. In order to make sure that your retirement plan assets are working in harmony with the next chapter in your life, consider the following:
The first step is to read through your current plan's agreement. Doing so will help you understand if your new employer plan accepts rollovers as some may not. Ultimately, plan sponsors maintain the membership guidelines. In some cases, your former employer’s plan may allow the sponsor to cash-out the account when you end employment. Withdrawals could trigger income taxes and a 10 percent penalty.1
Next, gather any appropriate account statements and contacts. When you signed up for the plan, you may have selected both a Traditional and a Roth option, but keep in mind, these are two separate accounts. Traditional contributions are not taxed but are subject to penalties in the case of early withdrawal. Roth contributions, on the other hand, are taxed but withdrawals have no adverse effect as long as the distribution is considered qualified by the IRS.2
It may be a good idea to meet with a financial advisor before starting the rollover process. You‘ll want to choose the right type of retirement account and avoid paying taxes or penalties for potentially choosing a plan that isn’t right for you. For example, if you decide to roll your Traditional account into a Roth, you should prepare to pay taxes on the full amount.
A financial advisor can help you make informed decisions as you continue saving. They can offer assistance by reviewing your previous employer’s plan and weighing the benefits of your new employer’s retirement plan. More importantly, their involvement will make sure the necessary steps are taken to move your funds with limited repercussions.
If you leave money in your previous employer’s plan, it’s a good idea to have an advisor review the plan’s progress over time. If you decide to transfer funds, the previous plan’s administrator can often send the check to a designated contact. Working with your advisor will be beneficial as they can coordinate such transactions.
Depending on the length of your previous employment, it may also be a good idea to check the associated vesting schedules. Vesting schedules are tied to the employer’s contributions and determine the amount and date when the employer’s contributions are legally yours. Your own contributions are fully vested from day one.
Age is another contributing factor when deciding how to approach a former employer’s plan. For instance, if you quit a job, are laid off or fired the year you turn 55, you may withdraw funds penalty-free from the retirement plan established through that employer only.3 If you choose to roll the funds over into another employer's plan or IRA, you will need to wait to withdraw those funds until age 59½ in order to avoid the 10 percent withdrawal penalty. In addition, this penalty-free withdrawal does not count for retirement accounts established through previous employers. It only is eligible in regards to the account established with the employer you've left at age 55 or older. If you're unsure about what options may be right for you, talk with a financial advisor to help ease your concerns and help you avoid costly mistakes.
Lastly, keep in mind that your new employer may have a waiting period before you are able to rollover funds. In this case, your advisor may suggest that you open an investment account to continue contributions during the waiting period. Opening another account allows you to take advantage of the tax deduction until you make your final decision. Keeping investment growth active could be more beneficial for you in the long run.
You don't have to make the transition alone. We realize the challenges that you are up against and focus on providing guidance in times of change.
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This content is developed from sources believed to be providing accurate information, and provided by My NP Advisor. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.