Changing employers means making decisions about your 401K retirement plan. Knowing the basics ahead of time can help you navigate the process. A good tax planning and investment advisor can provide specific information on your situation.
With many people in job transition these days, it is important to know the basics of managing 401K retirement funds when you change employers.
"If at all possible, avoid cashing in your 401K," says Jim Bear, president of J. Alan Financial in Champlin and a registered representative with KCD Financial, Inc., a securities broker/dealer who is a member FINRA and SIPC. "If you do cash it in, you may owe taxes as well as a 10 percent penalty if you're under 59 years old," he says. Even more important, Bear says, "You might be missing a growth opportunity."
Leaving your money with your previous employer is one possibility. Bear says, "A 401K is generally an inexpensive type of retirement plan." In addition, people over 55 may have "added liquidity features" inside a 401K. You won't give up your right to move your 401K at a later date, according to the Financial Industry Regulatory Authority (FINRA) website (www.finra.org). But you won't be able to make additional contributions once you've left employment.
Know The Options
Instead of cashing in, rolling over the 401K to an IRA may provide investors with a wider range of investments, Bear says. "Perhaps you'd like investments closer to your value system." Some people may prefer lower-risk choices; others want to invest for income. Those options are all available to those who roll their 401K to an IRA depending on the investment vehicle they choose.
Bear notes that it is best to make these decisions with the guidance of a trusted financial advisor who can help you with a direct rollover from the 401K to the IRA. "It's clean and simple," Bear says, and in many cases the financial advisor can get things started with a simple phone call.
A mistake that investors often make is initiating an indirect rollover - taking a cash distribution and then depositing it in an IRA or a new employer's 401K. This should be a "financial last resort," according to FINRA's website. In an indirect rollover, the employer will withhold 20 percent of the 401K balance against possible taxes. The investor will have to complete the indirect rollover within 60 days or it will be considered a "lump sum distribution."
Bear emphasizes that financial advisors make recommendations based on each investor's specific needs. For more details on how to maximize your 401k options, go to Bear's own website at www.safemoneymn.com which contains "a library of articles." Bear also recommends www.irs.gov/retirement for "answers to every imaginable question about an IRA."
Laura French is principal of Words Into Action, Inc., and is a freelance writer from Roseville.