How Long Do You Have to Move Your 401(k) After Leaving a Job?
You have 60 days to roll over a 401(k) into an IRA after leaving a job–but there are many other options available to you in these circumstances when it comes to managing your retirement savings.
What happens to your 401(k) if you leave your job?
You have a number of options when it comes to managing your 401(k) after you leave your job:
Leave the 401(k) in the care of your former employer.
If your 401(k) balance is low – say $5,000 or less – most plans will allow you to keep the money where it is after you leave. By default, you may be able to manage the money without making changes, but your investment choices will be limited. If the money is under $1,000, the company may cut you a check to force the money out. If the money is between $1,000 and $5,000, they will likely help you set up an IRA if they are forcing you out.
Move the 401(k) to your new employer’s 401(k).
If you change companies, it’s typically no problem to rollover your old retirement plan into your new employer’s 401(k). With a little bit of paperwork, the old plan administrator can simply shift the contents of your account directly into the new plan account with a direct transfer. This custodian-to-custodian transaction is not considered taxable.
Another option is to elect to have your balance distributed to you in check format, which you can then deposit into your new 401(k) account within 60 days, without paying the income tax. If you are a sole proprietor, freelancer, or entrepreneur, you may also consider setting up your own Solo 401(k) for yourself (and potentially your spouse or a partner) at this point. If you are in the middle of a lawsuit or worry about future claims against your assets, leaving your money in a 401(k) (versus rolling over into an IRA) is going to offer better protection against liquidation.
Roll the 401(k) over into an IRA.
What if you’re not moving to a new employer immediately or your new employer doesn’t offer a 401(k)? What if your employer requires you to put in a number of years before you become “vested” and eligible to participate in their 401(k) plan?
In these circumstances, stashing your money in an IRA with the financial institution of your choice is a freeing solution. You’ll be able to choose where, how, and when you invest unless you agree to pay a broker to manage the funds for you. A direct rollover is ideal to avoid paying taxes on the amount transferred over; you have 60 days to roll your 401(k) over into the new IRA.
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Agree to take the distributions.
If you are retiring, you can take penalty-free distributions on your savings starting at age 59.5. If you are under age 59.5, you can still take a distribution, but you will need to pay a 10% penalty unless you meet the “hardship exemption” or “IRS Rule of 55” criteria. If you are 72 or older, you must take minimum withdrawals. Keep in mind you will need to pay income tax on the withdrawn amount – unless you set up a Roth 401(k) that you had for at least five years and paid taxes when you put the money in. If you fail to meet the five-year requirement, only the earnings portion of your distributions is subject to taxation.
Cash it out.
A lump-sum distribution will liquidate your old 401(k) account, but you will need to pay the full tax burden, and you may be subject to the 10% early withdrawal penalty. By taking the full amount, you will essentially be starting all over in saving for retirement.
Generally, it’s best to allow the money to grow in a tax-deferred account unless you are, in fact, retiring and need all of the money to meet an extreme hardship need right now.
Ubiquity is a 401(k) plan provider for entrepreneurs and small businesses. Contact us for assistance in setting up a new 401(k) or in rolling over an existing 401(k) to a new account.