Is it possible to train your retirement plan? We think so.
Maybe you’re about to change jobs, change companies, or change your career completely. Whatever change is a foot, we don’t have to remind you how important it is to keep an eye on your retirement funds during tumultuous times. Assets for your retirement should be able to respond to any possible changes with ease. All it takes is a little training.
If you’re changing jobs and have an existing retirement plan, such as a 401(k), you should already have a Summary Plan Description in your possession. This will describe your retirement plan and the options available to you, regarding your old (or, soon to be old) companies plan. You want to share this document with a financial professional so the two of you can decide what option fits you best. Many companies have restrictions on what can and can’t be done with your retirement fund. As with most financial planning, a little education goes a long way and knowing the details of your plan will help make the transition a bit smoother.
Generally, you’ll have three major options for your retirement fund when changing jobs. You can withdraw your investment savings and keep the money as a lump sum (sit), you can leave the money where it is (stay), or you can “rollover” your retirement savings into another retirement plan or an IRA. Each option has its pros and cons. Depending on your situation in life and in your career, you’ll want to consult a financial consultant and choose the option that makes you feel most comfortable.
If you choose to withdraw your money in a lump sum from a previous employer’s retirement fund, you must pay taxes on the money you withdraw. On top of those taxes, your employer is required to take a 20% withholding from your lump sum, and if you are under age 59 ½, you may also be forced to pay a 10% penalty tax. You may roll over the lump sum and avoid the penalty provided that you deposit the funds in an IRA or another employer plan within 60 days. You will have to make up the additional 20% withheld by your employer. The 20% withholding will be deducted from your reported income when your taxes are due.
Leaving the money in your current plan is one option when changing jobs or companies. However, you must also be aware of any possible regulations and restrictions your old company has placed on your money in that retirement plan.
If you choose the 401k rollover option, you may have the option of rolling your assets into either an IRA or your new employers plan. However, to avoid paying taxes and penalties, you should have these assets transferred directly to another IRA custodian. This rollover will still have to be reported to the I.R.S. One downside is that your retirement rollover cannot be rolled into a Roth IRA account. However, you may qualify for a Rollover IRA rules which can than be rolled into a Roth IRA, but you must meet certain qualifications. Once a 401k rollover has been put into a Roth, you cannot roll the Roth into another employee-sponsored retirement plan.
There are, however, exceptions to the rules of roll-overs for first time homebuyers. If you’re emptying out your former retirement fund and wish to use up to $10,000 towards the purchase of a first home, you’re allowed to do so. You are taxed on the withdrawal, but you do not have to pay the extra 10% early withdrawal fee. You also have up to 120 days to use the $10,000 on a first-time home purchase rather than the basic 60 days.
These are just the basic options you may have when changing careers and retirement plans. Deciding what to do with your retirement savings when changing companies or careers is one of the most crucial decisions you’ll make. And by being prepared in advance, you’ll know when it comes time to confront change, you’ll be ready.