Changing Jobs? Take Your 401(k) and Roll It

If you’ve lost your job, or are changing jobs, you may be wondering what to do with your 401(k) plan account. You are entitled to a distribution of your vested balance. Your vested balance always includes your own contributions (pretax, after-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions (and earnings) that have satisfied your plan’s vesting schedule. It’s important to understand your particular plan’s vesting schedule because you’ll forfeit any employer contributions that haven’t vested by the time you leave your job. Your summary plan description (SPD) will explain the vesting schedule, this can be provided to you by the plan administrator. If you’re on the cusp of vesting, it may make sense to wait a bit before leaving.

 Don’t spend it, roll it

While this pool of dollars may look attractive, don’t spend it unless you absolutely need to. If you take a distribution you’ll be taxed, at ordinary income tax rates, on the entire value of your account except for any after-tax or Roth 401(k) contributions you’ve made. And, if you’re not yet age 55, an additional 10% penalty may apply to the taxable portion of your payout. Your employer must also allow you to make a direct rollover to an IRA or to another employer’s 401(k) plan.

Should I roll over to my new employer’s 401(k) plan or to an IRA?

Assuming both options are available to you, there’s no right or wrong answer to this question. It’s best to have a professional assist you with this, since the decision you make may have significant consequences–both now and in the future.

Reasons to roll over to an IRA

You generally have more investment choices with an IRA than with an employer’s 401(k) plan. You typically may freely move your money around to the various investments offered by your IRA trustee, and you may divide up your balance among as many of those investments as you want. It can also allow you to have IRA accounts with more than one institution for added diversification. An IRA may give you more flexibility with distributions where your options in a 401(k) plan depend on the terms of that particular plan.

Reasons to roll over to your new employer’s 401(k) plan

If you roll over your retirement funds to a new employer’s plan that permits loans, you may be able to borrow up to 50% of the amount you roll over if you need the money. A rollover to your new employer’s 401(k) plan may provide greater creditor protection than a rollover to an IRA. Most 401(k) plans receive unlimited protection from your creditors under federal law. In addition, you may be able to postpone required minimum distributions.

For more information about saving for retirement and 401(k) rollovers, contact Scott Brady at 248.443.4234, email: sbrady@michiganfirst.com.

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