According to a news release from the Bureau of Labor Statistics people born between 1957 and 1964 held an average of 11.7 jobs from ages 18 to 48. That’s right – the average American changes jobs about as often as Beyoncé changes costumes during a concert.
Whether you expect to be on the above or below that surprising statistic, it emphasizes an important point: You will likely change employers multiple times during your career. And in addition to learning new skills or adapting to a new company’s culture, you’ll have some decisions to make about how to handle your previous employer’s retirement plans.
What can I take with me when I leave?
If you change employers, you are entitled to the distribution of your 401(k) vested balance. Your immediate vested balance always includes the money you have contributed to the plan and the earnings from your investment contributions.
If you’re lucky enough to receive extra contributions from your employer, you will often need to satisfy a certain amount of work experience before you’re eligible to take their contributions with you if you leave.
Usually this happens either gradually over a number of years:
- You vest 20% per year over 5 years
Or all at once after a certain period:
- You vest 0% after year 1, 0% after year 2, and 100% after year 3
Ask your plan administrator or HR representative about your vesting schedule before taking a new position.
What happens if I spend it?
Hopefully, you won’t ever need to find out. It’s not pretty.
For starters, it’s likely that your 401(k) contains money that has not been taxed yet, so taking a distribution will trigger a tax event. To make matters worse, that money will be taxed at your highest marginal rate, meaning you’ll get to keep a smaller percentage of the distribution than of your regular paycheck.
On top of that, those who are under age 55 will potentially face an additional 10% penalty for taking the money out of their 401(k).
I’ve decided not to spend it…What are my options?
Your options are:
- Leave the money with your current employer’s plan if the balance is over $5,000
- Roll the balance to your new employer’s 401(k)
- Roll the balance to an IRA
When you roll the balance to a new qualified account, such as your new employer’s 401(k) or your IRA, it’s recommended to do a “direct rollover”. When doing a “direct rollover”, the plan administrator or HR department can send the money directly from your old plan to the new plan.
A direct rollover is preferable to an indirect rollover, also known as a “60-day rollover”. When doing an “indirect rollover”, your employer sends a check directly to you – thus, indirectly to your new account – and you are responsible for depositing it into your new account within 60 days. Your former employer will withhold 20% of the balance for taxes, and you might need to come up with that extra 20% to contribute to your new account.
All things being equal go for the direct rollover.
If you’d like to discuss your 401(k) rollover options further, please contact Steve Hengehold via email [email protected] or 513-598-5120.
Date Posted: 06/01/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your Wealth Accumulation or Retirement Income Plan with an HCM Wealth Advisor, please give us a call – 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 28 states, and we’d love to help.