The Great Resignation: What to do With Your Retirement Account if You’re Leaving Your Job.Submitted by MIRUS Financial Partners on October 25th, 2021
As the pandemic life slowly recedes, Americans are leaving their jobs in record numbers to find positions that offer more flexibility, less stress, or more money. Others are leaving the workforce for good, as record numbers of U.S. seniors retire early. This unprecedented behavior has been called “The Great Resignation,” and it’s creating labor shortages in almost every industry.
Leaving a job may also mean leaving a retirement plan behind. However, retirement plans don’t have to stay with previous employers. There are many reasons to consider moving these funds into other retirement savings vehicles (a rollover). This article will discuss what a rollover is, the different types of rollovers, and the other investment options available to you.
A rollover is the movement of funds from one retirement savings vehicle to another. For example, you may move from one 401(k) to another, or you may choose to transfer your funds into a different type of investment vehicle.
While leaving a job is the most common reason to consider a rollover, rollovers are also options if you want to switch investments, or you've received death benefits from your spouse's retirement plan.
It’s important to know that some distributions can't be rolled over, including the required minimum distributions (to be taken after you reach age 70 1⁄2 or, in some cases, after you retire. In addition, there are restrictions on certain annuity or installment payments, hardship withdrawals, and corrective distributions of excess contributions and deferrals. If you’re not sure if these apply to you, an experienced financial advisor can help.
The Direct Rollover, or Trustee-to-Trustee Transfer
Retirement funds can be rolled over in two ways–the indirect (60-day) rollover and the direct rollover (or trustee-to-trustee transfer). A direct transfer of funds occurs directly between the trustee or custodian of your old retirement plan and the trustee or custodian of your new plan or IRA. In this type of transfer, you never receive the funds or have control of them. As a result, a trustee-to-trustee transfer is not taxed in the same way as a distribution. This means that when you initiate a direct rollover, you no longer have to worry about the 60-day deadline or the 20 percent withholding considerations.
Whenever you are eligible for a distribution from your employer's retirement savings plan, they are required to offer the option of making a direct rollover to another employer's retirement savings plan or IRA.
Because the money is moved directly from one retirement savings vehicle to another without issues of withholdings or taxation, a trustee-to-trustee transfer can be the most efficient way to move retirement funds.
The Indirect, or 60-Day, Rollover
With the indirect method, you start by receiving a distribution from your retirement plan. Then, once the funds are in hand, you must deposit the funds into the new retirement plan account or IRA within 60 days. Regulations allow rollovers at any age.
When executed correctly, there is no income tax on rollovers. However, if you fail to complete the rollover or miss the 60-day deadline, you may be subject to a 10 percent early distribution penalty. If you’re older than 59 1⁄2, exceptions apply.
Additionally, if you receive a distribution from an employer retirement plan, your employer must withhold 20 percent for taxes. If you provide that 20 percent from other sources to ensure 100 percent of your investments go into the new retirement savings vehicle, that amount will be deducted from your taxable income.
Review Your Rollover Options
Once you leave a job, you can handle your retirement savings plan in a variety of ways. Whether you choose a direct or indirect transfer of funds, you have a variety of options, each with its own pros and cons.
Keep Your 401(k) Plan With Your Previous Employer
Some employers allow past employees to keep funds in their 401(k)s after leaving. If your new employer doesn't offer a 401(k) or provides a plan with fewer advantages, this option may make sense.
If your 401(k) plan account has substantially outperformed the markets over time, you may want to keep your funds in place. When you leave your job in or after the year you reach age 55 and plan to start withdrawing funds before turning 59 ½, the withdrawals will be penalty-free. Additionally, if you plan to be self-employed, keeping your funds in your previous employer’s 401(k) may make sense.
However, some people find it complicated to track several different accounts connected to different places of employment. You won’t be able to continue to contribute or get employer matches from previous employers. In some cases, you’ll no longer be able to take a loan from the plan or take partial withdrawals.
On the one hand, many employer plans offer limited investment options, often selected by the employer. Conversely, IRAs offer a wide variety of investment choices. Employer plans are often strict about distribution options, but you usually have more flexible options in an IRA (especially for your beneficiary following your death).
Every financial situation is different, but some people may find that they save a lot in management fees and administration fees when they roll over into an IRA.
IRAs also make sense for many estate plans. 401(k)s are often paid in one lump sum to beneficiaries, while IRAs usually offer more payout options. This could reduce taxes for your heirs. But, again, each person and situation is different, so talk to a financial advisor before moving your funds to ensure you get the maximum tax benefits.
Rollover to Your New Employer’s Plan
For some people, an employer’s plan administrator managing your retirements saving is convenient. The contribution ceilings are also higher on 401(k)s vs. IRAs. Moving funds into a new employer’s plan also makes sense if the new plan is a good one with lots of investment options and low fees.
Also, make sure the plan’s options work with your retirement savings goal. For example, if you plan to continue to work after age 72, keeping your funds in a 401(k) allows you to delay taking your required minimum distribution.
However, suppose your new employer offers a SEP IRA or SIMPLE IRA. In that case, you may need to observe a waiting period and consider other conditions before moving your 401(k) funds into their IRA-based retirement savings programs.
Finally, rollovers into your new employer’s sponsored retirement savings plans may offer better creditor protection. In general, federal law protects IRA assets up to $1,362,800 (scheduled to increase on April 1, 2022)—plus any amount rolled over from a qualified employer plan or 403(b) plan—if bankruptcy is declared. Assets in a qualified employer plan or 403(b) plan generally receive unlimited protection from creditors under federal law, regardless of whether bankruptcy is declared. SEP and SIMPLE IRAs are not included in or subject to this limit and are fully protected under federal law if you declare bankruptcy.
Cash Out Your 401(k)
Cashing out may be tempting, but there are many penalties involved. First, your withdrawal will be taxed at your current tax rate. Unless you’re 55 years old and planning to stop working, you may have to pay an additional 10 percent penalty. Working people can withdraw without that 10 percent penalty after reaching age 59 ½.
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