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So, you’re fed up with your current job and you found the role of your dreams! Your cover letter impressed the recruiter, you nailed the interviews, and you start in two weeks! Now that you’re changing career tracks, what happens to your current 401(k)?

While you can just take the money and run, there are several downsides to this scenario. Taking a lump sum withdrawal before retirement age incurs penalties, and before you can put your money towards tuition, a new home, or an existing loan, you may have to pay both state and federal taxes on those contributions. Additionally, the lump sum might nudge you into a different tax bracket, and you’ll incur other fines before you get your cash. (For instance, cashing out your retirement fund before age 59 gets you a 10% penalty.) The one perk here is that you have cash now over later, but in most cases the cons outweigh the pros. There are three common actions you can take for your existing 401(k): preservation, rollover, and IRA holding.

Preservation: In this option, you keep your investment with your previous employer. They might offer better retirement options than your new employer, and if you have at least $5,000 safely tucked away in that account, you have a legal right to keep it there. However, there are a few conditions that accompany the preservation plan –

  • If your account holds less than $1,000, your employer has the option to cut a check to cash you out of the plan, or they may assist with the creation of an IRA to hold the funds
  • You can no longer contribute to that plan and changing employers means you could have multiple accounts “floating around”
  • Finally, since you’re leaving that company, the provider might charge you maintenance fees

Generally, you have between 30-90 days to decide which action you want to take, and it’ll take a little research into your employer’s policies to discover which rules apply to your situation.

Rollover: Verified by a recent post from Quicken, just about all 401(k) plans accept rollover transfers from pre-existing accounts. By merging your retirement funds, your money is easier to manage, and having a single account keeps your investment front of mind. There are two methods for merging accounts: indirect rollover and direct rollover. With an indirect rollover, your previous provider writes a check and you are responsible for getting it to your new account. It sounds simple, but according to financial planners, things cans still go haywire during this process. Keep a few things in mind if you’re considering this route –

  • You must deposit the old distribution funds within 60 days to avoid paying income taxes, as your 401(k) plan is required to withhold 20% on the taxable portion
  • Make sure these funds are active in your new account before closing the pre-existing one

Using a direct rollover, on the other hand, can be more worry-free – you speak to the pros, fill out a form, and it’s taken care of.

IRA: Lastly, a common option is to create an Individual Retirement Account (IRA), which gives you control and flexibility over your retirement fund. This means that your plan is not up to your employer, it’s up to you. You may invest in as many stocks and bonds as you like, they aren’t the same limits to your investment options as there are going through an employer 401(k), and you may name any beneficiaries. The rollover process for an IRA is the same as a 401(k) rollover listed above: you can either have the plan administrator do this directly or take a full distribution and deposit it into an IRA yourself within 60 days. Usually, the IRA option is viewed as the best bet by financial consultants, since you have smaller fees and greater flexibility with investment opportunities. The main thing to keep in mind here is choosing between a traditional IRA and a Roth IRA, determining when you want to pay out taxes on your nest egg.

These methods are meant to guide you in the right direction, but everyone’s situation is distinctly unique. Consulting an expert can cater to those specific needs. If you’re looking to discuss specific career needs, contact Sandra today to go over the possibilities!