One of the most important financial decisions workers will make is what to do with assets they have accumulated in their employer’s retirement plan when they leave their job. Traditionally, this decision needed to be made when workers retired, but it’s not just a retirement issue anymore.
Today, most workers will change jobs several times during their working years. Unlike past generations that may have spent most of their career with a single employer, the median tenure for a worker today is only 4.6 years. Each worker who decides to go to work for a new employer may be faced with the decision of what to do with the retirement plan assets in the prior employer’s plan. The choices workers make each time they change jobs will have a significant impact on their retirement nest eggs.
When can I rollover a 401(k)?
You are able to withdraw assets from your 401(k) plan only if you experience a triggering event. For most 401(k) plans, the triggering events are the following:
- Termination of employment (Did you get a new job, or retire?)
- Attaining retirement age (this is generally age 59½, but could be either earlier or as late as age 65)
- Death - in this case, your beneficiaries are allowed to distribute your assets
- Disability – the plan document typically provides a definition of "disability". Each plan may vary
- If your employer terminates the 401(k) plan and does not replace it with another qualified plan
What are my 401k options?
- Roll the assets to an IRA
- Leave the assets in the prior employer’s plan
- Roll the assets to a new employer’s plan (if continuing to work and a plan is available)
- Cash out the retirement savings
Determining which option is best for you can be challenging. There is no “one size fits all” solution. The best choice will vary depending on your financial needs and savings objectives.
How can we help?
- Regardless of what option you elect, it will affect your financial future. We are here to help you understand the impact of each option available and to help you make an appropriate decision for your situation
- If an IRA rollover is appropriate, we are here to not only help manage your investments, but to help coordinate your contributions, withdrawals, and taxable events
- Existing IRAs can be rolled over under our management to help reduce expenses and to consolidate assets to simplify investment decisions
- We cannot give specific investment advice for assets held in an employer plan, but when assets are rolled under our management, we are responsible for working with you to choose an appropriate asset allocation
Why did my 401(k) automatically rolled over?
Some rollovers occur automatically, even though an individual has not requested a payout from the employer plan. Many plans are designed to automatically pay out assets when a worker terminates employment if the individual has a plan balance less than $5,000 and has not directed the plan administrator to either make a distribution or roll it to another plan. These payouts are sometimes referred to as “automatic rollovers” or “force-outs.”
- If the balance is $1,000 or less, it may be simply cashed out and sent to the individual without the individual’s authorization.
- If the vested plan balance is between $1,000 and $5,000, the amount automatically disbursed from the plan must be rolled over to an IRA that is set up on behalf of the former employee.
What considerations should I take before I make a decision?*
WHEN ROLLING OVER FUNDS TO AN IRA
- IRAs can be used to consolidate assets from multiple employer plans
- May have access to a broader range of investments than in an employer plan
- IRA owner can change investments at any time
- IRA trustee or custodian handles contribution and distribution reporting & will assist with age 70½ RMD calculations
- Distributions are available at any time
- Additional exemptions from the 10% early distribution tax (for distributions taken prior to age 59½) apply to IRA distributions (e.g., certain higher education expenses, first-home purchases)
- Roth IRAs are not subject to the age 70½ RMD rules
- Creditor protection is available in New York State
- IRA owner may be able to make annual contributions to IRAs
- Flexible conversion & re-characterization options enable IRA owners flexibility in deciding when to pay taxes on IRA assets
- IRAs may offer more flexible beneficiary options (e.g., stretch IRAs)
- Investment fees may be higher when offered through an IRA as compared to an employer-sponsored retirement plan
- RMDs must begin at age 70½ (traditional IRA)
WHEN LEAVING FUNDS IN PREVIOUS EMPLOYER’S PLAN
- Investment fees may be lower when offered through retirement plans as compared to individual retail accounts
- Some administrative costs may be paid by the employer
- Many plans allow loans, permitting access to plan assets with the ability to restore retirement savings
- Separation from service after age 55 is an exemption from the 10% early distribution tax (for distributions taken prior to age 59½) that is available for qualified plan distributions but not IRA distributions Creditor protection
- Plan assets are not subject to creditor claims
- Investment selection may be more restrictive than an IRA
- Employer has the option to charge former employees’ accounts for certain administrative fees that are not being assessed against current employees
- Plan may allow someone who is still employed to delay age 70½ required minimum distributions (RMDs)
- Plan may limit the types of distributions allowed, making it less feasible to take a stream of retirement income payments (commonly called “installment payments”) or to implement estate planning strategies
WHEN ROLLING OVER FUNDS TO NEW EMPLOYER’S PLAN
- Same potential benefits as leaving assets in previous employer’s plan
- Ability to consolidate assets to simplify investment decisions & overall management of retirement savings
- Need to compare investment options, plan features, & services in new employer’s plan versus previous employer’s plan
WHEN CASHING OUT A RETIREMENT PLAN
- Taxation of all pre-tax amounts in year of distribution (e.g., employee deferrals, employer matching & profit sharing contributions)
- If assets are used, rather than invested, risk that retirement savings will be depleted
- 10% early distribution tax applies, if under age 59½ (unless exception applies)
- 20% mandatory withholding if taxable amounts eligible for rollover
- Access to assets at any time
- Creditor protection is generally limited for non-retirement assets
* This is a list of many, but not all of the considerations that should be taken into account before a decision is made. To best understand your options, set up an appointment with one of our Financial Advisors.
Contact us and gain a strong understanding of what options there are available to you with no obligation to move forward.
Cornerstone Advisory Group
200 Park Point Drive
Rochester, NY 14623