Don’t forget to take care of your 401 (k) if you join ‘Great Resignation’

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Leave the money or move it?

The first decision for your retirement savings is to leave it in your former employer’s plan, if permitted. Of course, you can no longer contribute to the plan or receive matching funds from the employer.

However, while it may be the simpler immediate choice, it could lead to more work in the future.

“The risk is that you will forget it later,” said Will Hansen, executive director of the Plan Sponsor Council of America.

Basically, finding old 401 (k) accounts can be difficult if you lose track of them. (There is also legislation pending in Congress that would create a “lost and found” database to help locate lost accounts.)

Also be aware that if your balance is low enough, the plan might not allow you to stay there even if you want to.

“If the balance is between $ 1,000 and $ 5,000, the plan can transfer the money to a [individual retirement account] on behalf of the individual, ”said Hansen.

“If it’s less than $ 1,000, they can take you out,” he said. “It’s according to plan.”

The risk is that you forget [the account] down the road.

Will hansen

Executive Director of the Plan Sponsor Council of America

Your other option is to transfer the balance to another qualifying pension plan. This could include a 401 (k) with your new employer – assuming renewals from other plans are accepted – or an IRA.

Be aware that if you have a Roth 401 (k) it can only be transferred to another Roth account. This type of 401 (k) and IRA involves after-tax contributions, which means you don’t get tax relief up front like you do with traditional 401 (k) plans and IRAs. But Roth’s money grows tax-free and isn’t taxed when you make qualified withdrawals later.

If you decide to move your retirement savings, you need to make a trustee-to-trustee transfer, where the balance is sent directly to the new 401 (k) plan or to the IRA custodian.

Plus, while all the money you put in your 401 (k) is still yours, the same can’t be said for employer contributions.

Acquisition schedules – the length of time you have to stay with a company for its matching contributions to be 100% yours – range from one to six years. Any unearned amounts are usually lost when you leave your business.

Outstanding loans

Among 401 (k) plans that allow participants to borrow money, about 13% of savers have a loan in their account, according to a Vanguard study. The average loan balance is approximately $ 10,400.

If you quit your job and still have to pay, chances are your plan will require you to pay off the remaining balance fairly quickly; otherwise, your account balance will be reduced by the amount due and considered a distribution.

Simply put, unless you can find that amount and put it into a qualifying retirement account, this is a distribution that may be taxable. And, if you’re under 55 when you quit your job, you’ll pay a 10% early withdrawal penalty. (Workers who leave their companies when they reach this age are subject to special opt-out rules for 401 (k) plans – more information below.)

If this is initially considered a distribution, you have until tax day of the following year to replace the loan amount – that is, if you were to leave in 2022, you have until until April 15, 2023 to find the funds (or Oct. 15, 2023, if you are filing an extension). Before major changes in tax law that took effect in 2018, participants only had 60 days.

According to Vanguard, about a third of the plans allow their ex-workers to continue paying the loan after they leave the company. It’s worth checking out your plan’s policy.

Reasons to take a break

There is something called the Rule of 55: If you quit your job in the year you turn 55 or after, you can receive distributions without penalty of your 401 (k).

If you transfer money to an IRA, you lose that ability to draw money before the age of 59 and a half, the standard age at which you can usually make withdrawals from retirement accounts without paying any money. penalty.

Also, if you are the spouse of someone who is planning to transfer their 401 (k) balance to an IRA, be aware that you would lose the right to be the sole heir of that money. With the workplace plan, the beneficiary must be you, the spouse, unless you sign a waiver allowing them to be someone else.

Once the money lands in the rolling IRA, the account owner can name anyone as the beneficiary without the consent of his or her spouse.

About Joan Dow

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