What to Do with Your Retirement Account If You Change Jobs

Whether you leave an employer for a wonderful new opportunity or are let go for reasons outside of your control, when you switch jobs, it’s easy to forget about the money you have saved in your retirement plan.

Sometimes, retirement plan savings can stay in a previous employer’s plan. Other times, your money can’t stay in the plan, and you need to take action, or your employer may move your money for you. The circumstances depend on the type of plan the employer offers and the amount of money you have in your account.

What If My Money Is in a 401(k) Plan?

A 401(k) plan is the most popular type of employer retirement plan. The rules for distributions vary from plan to plan. But if you participated in your old employer’s 401(k) plan, then you may have several choices.

Rollover Your Savings

Plan participants can roll over the funds from an old employer’s plan into an Individual Retirement Account (IRA) or a new employer’s plan. There are a few reasons to choose a rollover:

• No penalty taxes. When you choose to do a rollover savings directly (meaning you never receive the money) from one retirement plan into an IRA or another 401(k), there are no penalty taxes. All of your money keeps working for you with tax advantages. (1)

• It’s easier to keep track of your funds. Many people change jobs every few years. Moving retirement savings from previous employers’ plans into one account can simplify things. You know where the money is, you know how it’s invested, and you can easily rebalance investments or make other changes.

• There’s less administrative work involved. Even if you choose paperless options, having multiple retirement accounts means tracking more tax documents, remembering more passwords, and updating more accounts when your address or personal information changes. Consolidating your assets can simplify things.

Just keep in mind, when deciding whether an IRA or a new employer’s plan is the right choice for a rollover, it’s important to compare investment options and fees.

Withdraw Your Savings

Plan participants can withdraw their retirement savings when they leave an employer or change jobs. The catch is, if you make a withdrawal before age 59½, you may lose as much as half of your savings to income and penalty taxes. (2)

Once you receive a check, you can roll over your savings into an IRA or a new retirement plan. However, if income taxes have been withheld, you’ll have to make up the difference to complete the rollover and avoid all income and penalty taxes. (2)

Do Nothing

The reality is financial decisions often inspire inertia. It’s easier to do nothing than to gather the information needed to make a confident decision. As a result, many people leave their retirement savings in former employers’ plans.

That’s okay if you have more than $5,000 in your plan account. However, if you have less than that amount, your employer may have the right to take action and move the money out of the plan. (1)

• If you have less than $1,000 in your account, the plan may automatically default to sending you a check with 20 percent withheld for income taxes. The penalties and rollover options are similar to those you have when savings are withdrawn.

• If you have between $1,000 and $5,000, the employer may automatically roll over your savings into an IRA offered through a provider selected by the plan sponsor.

While it can be tempting to do nothing as a default option, when it comes to retirement plan savings, it’s better to take time, consider your options and any fees or penalties that may be incurred, and make a choice that suits your needs.

What If My Money Is in a SIMPLE or SEP IRA Plan?

Often small businesses offer different types of retirement plans, such as Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) IRA plans. The options are similar to those of 401(k) plans, but there are significant differences. For instance, plan participants can take withdrawals from SIMPLE and SEP IRAs at any time. Withdrawals may be taxed as ordinary income and subject to penalty taxes if the participant is younger than age 59½. (4)

SIMPLE IRAs Have a Two-year Holding Period

SIMPLE plan options are similar to 401(k) plan options. Plan participants typically can leave money in the plan, take a withdrawal, or roll over their savings.

For withdrawals and rollovers into accounts other than another SIMPLE IRA, there may be penalties that vary based on how long your money has been in the plan. (5)

• If your money has been in the SIMPLE IRA for two or more years, income taxes may be withheld, and a 10 percent penalty tax may be owed, depending on your age.

• If your money has been in the plan for less than two years, a 25 percent early distribution penalty may be assessed.

SEP IRA Plan Rules Mirror Those of Traditional IRAs

Plan participants typically have several options. For instance: (4)

• You may be able to roll over savings directly into another type of IRA to avoid penalty taxes and keep tax advantages.

• You could make a withdrawal but keep in mind any money withdrawn before age 59½ is subject to income and penalty taxes. After a withdrawal, the participant has 60 days to roll over the funds (including any money withheld for income taxes) into a new retirement plan option.

• You can leave the funds in the SEP-IRA.

Again, it’s not always advisable to simply leave the money in the account as a default. Look into the pros and cons of your various options and make an informed decision from there.

Whether you leave an employer for your next opportunity or lose your job for reasons outside of your control, don’t forget about the money you have saved in your retirement plan. The rules governing retirement plans can be complex, so before making any changes to your retirement plan accounts, we recommend talking with your tax and financial professionals.

Sources:

1 https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions

2 https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/401k-rollovers

3 https://www.congress.gov/bill/116th-congress/senate-bill/3548/text#toc-H638004C502804947B4CFB9B4B770C2F2  (Section 2103)

4 https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals

5 https://www.irs.gov/retirement-plans/simple-ira-plan-faqs-distributions

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.