Changing jobs is a normal part of life. According to Bankrate, 56% of workers are going to be looking for a new job in the next 12 months. If you are transitioning jobs and took advantage of your previous employer’s 401(k) plan, you’ll have options for the money you earned and saved while working there. This money is an important part of your retirement plan and something you should keep track of as you navigate your career and plan for your future. According to Capitalize, nearly 20% of 401(k) assets in the U.S. were in forgotten accounts at the end of 2021.
Understand investment options
First, you typically have two options for your 401(k) when you leave your previous employer: keep your 401(k) money where it is with your previous employer’s provider or put it somewhere else (known as a ‘rollover’). Some employers might permit some or all of the current assets to stay in the plan. With this option, your money stays invested where it is, but no additional funds are added.
If your previous employer doesn’t allow this or you don’t want to keep track of multiple investment accounts, you may have the option to roll over the assets to a new employer’s 401(k) plan which your HR department can help you with. If you don’t want to use an employer sponsored plan, you could also rollover the funds in your previous employer’s plan into a new individual retirement account (IRA). It is important to know there are differences between employer 401(k) plans and IRAs. An IRA often enables an investor to select from a broader range of investment options while an employer-sponsored retirement plan might offer a smaller range of investment options. There are also different tax benefits for these accounts you may want to consider. Discuss with your financial team which investment options are best for your specific retirement goals.
Depending on your age, you might be ready to cash out your account’s value and add it to your retirement withdrawal strategy. If this is the case, you’ll want to make sure to have a plan in place to maximize your tax benefits.
Understand the different rules and regulations
Borrowing from your IRA:
It may be possible to borrow from an employer-sponsored plan. Generally, borrowing from your rollover IRA is considered a prohibited transaction, which would subject you to penalties and even potential disqualification of the IRA. Discuss with your financial team if this is an option for you.
Protection from Creditors and Legal Judgments:
Under federal law, you usually have unlimited protection from bankruptcy and creditors with the funds you have in employer-sponsored plans. With IRA assets, however, state laws vary in their protection from the claims of creditors. Protecting retirement assets from claims of creditors can be very complicated, so you should discuss any questions relating to your personal situation with competent legal counsel.
Required Minimum Distributions:
Once an individual reaches age 72, the rules for plans and traditional IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution. There are many different requirements for minimum distributions, so it is important to talk to your financial team about the best options for you.
Employer Stock:
It is important to mention your financial team if you have any employer stock in your retirement plan. Your employer stock distributions are taxed differently and have different rollover rules. When employer stock is distributed in a lump sum, in-kind, from an employer-sponsored retirement plan, the employee is taxed only upon the stock’s cost basis at the time of distribution. Later, when the stock is sold after the distribution from a qualified plan, the proceeds are treated as long-term capital gain‡ to the extent attributable to net unrealized appreciation‡.
An investor who holds significantly appreciated employer stock in an employer-sponsored retirement plan should carefully consider the tax consequences of rolling the stock to an IRA vs. taking a lump sum, in-kind distribution of the stock from the plan or leaving the stock in the plan. This is a very complicated issue which is why it should be discussed with your tax advisor.
If you ultimately decide to roll over your employer plan assets, it is important to read the IRA rollover plan information and all applicable investment literature and prospectuses carefully before deciding to invest in an IRA rollover. Past investment performance does not guarantee future results, and the value of your investment will fluctuate and may be more or less than the original investment.
If this feels overwhelming, don’t stress. Different levels of service may be available under each transfer option. Some employer-sponsored plans, for example, provide access to investment advice, planning tools, telephone help lines, educational materials and workshops. Similarly, IRA providers offer different levels of service, which may include online, discount or full brokerage services, investment advice and retirement and distribution planning.
It is also important to keep your financial team informed when you change jobs. Changing jobs is very common and your team will be able to give you advice for rollovers and investments best suited for your financial goals. Remember these employer plans could be a key part of your retirement strategy and should be something you regularly review with your financial team.
The foregoing discussion is provided for informational purposes only and should not be considered as tax or legal advice. You should consult with your own legal and/or tax advisors for advice about your personal situation.
When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.
