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Changing Jobs? A 401(k) Rollover May Be in Your Future!

If you are preparing to change jobs, do you know what your choices are for managing the money in your current employer's retirement plan? Although many people choose to take a cash distribution, there are other options that may benefit you more.

Uncle Sam Loves Cash Distributions

Taking a lump-sum cash distribution may trigger an immediate 20 percent federal withholding tax and you will owe ordinary income tax on the distribution which potentially could be more than 20 percent. In addition, a 10 percent additional tax may apply if you are younger than age 59½.* Taking your money in cash also means that you'll no longer enjoy the potential benefits of tax deferral that a qualified retirement plan offers.

Depending on your circumstances, you may have several options that will allow you to maintain the tax-deferred status of your retirement plan assets:

  • Leave the money in your former employer's plan. Your former employer must allow you to leave the money where it is as long as the balance exceeds $5,000. You'll no longer be able to contribute to the account, but you'll still decide how the existing assets are invested.
  • Roll over the money to your new employer's plan. By "rolling" the money directly to your new plan, you'll avoid the taxes and penalty that could eat away at a cash distribution. You'll also only have one set of investments to monitor. Even if you're not immediately eligible to contribute to the plan at your new job, you may still be able to roll over the money right away.
  • Roll over the money to an IRA. If your new employer doesn't offer a retirement plan or you aren't yet eligible to participate, you can roll over the money directly to a traditional IRA. Again, you'll avoid taxes and penalty that you'd incur if you took a cash distribution and still enjoy the potential benefits of tax deferral. Experts advise against commingling your retirement plan assets with other IRAs you may have set up. Instead, open a separate IRA account, known as a "conduit IRA," which may allow you to move the funds to a new employer's retirement plan at a later date.

Research Your Options

If you plan to change jobs, don't just take the money and run. Since rules vary from company to company, find the time to explore your alternatives. If you have specific questions about your retirement plan distribution options, contact your employer's benefits coordinator or a qualified financial consultant. PrimeWay Federal Credit Union wants to help you explore your options. We have tools, resources and an entire Investment Resources team ready to help you save for the future.

 Source/Disclaimer:

*If you're age 55 or older and separate from service, the 10 percent additional tax may not apply for certain periodic withdrawals taken from an employer-sponsored retirement plan. Keep in mind that the 10 percent additional tax may be incurred on distributions taken from an individual retirement account before age 59½.

Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. PrimeWay FCU and PrimeWay Investment Resources are not registered broker/dealers and are not affiliated with LPL Financial. The investment products sold through LPL Financial are not insured PrimeWay FCU deposits and are not NCUA insured. These products are not obligations of the PrimeWay FCU and are not endorsed, recommended or guaranteed by PrimeWay FCU or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.

 

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