![]() You will need to establish the new account, whether it is a new 401(k) or an IRA. The specific process for how you will roll over your account depends entirely on your existing 401(k), however, most financial managers handle this similarly. This is true whether you transfer the money to a new 401(k) account or an IRA. Rolling over your 401(k) does not account against your annual contribution limit. For someone who has had a number of different jobs over the years, this is often a good way to keep your retirement finances in one place. From a tax perspective these programs are structurally similar, so the IRS treats it as a continued retirement account rather than a substantive change in your finances. If you don’t have a new 401(k), or don’t want to use it, you can roll your old 401(k) into an IRA account. You may even be able do this even if there is a gap in time between employers, so someone who has a retirement account from a long-ago employer could consolidate their accounts if they chose. The only catch here is that not every employer accepts rollovers from external 401(k) accounts. If your new employer offers a retirement program, you can transfer the funds from your former employer’s 401(k) into the new one. Generally speaking you have two options for a 401(k) rollover: A new 401(k) In most cases this is your best option when leaving an employer. Rolling over funds is when you transfer your money from one retirement account to another. ![]() This applies equally to any account, whether or not you are still employed there. If you are younger than 59.5 years old, and if you do not meet one of the IRS’ other carve-outs for early 401(k) disbursements, permanently taking money from any 401(k) account will trigger a 10% penalty on top of all existing income taxes. It is unusual, if not rare, that cashing out your 401(k) is a good idea. The IRS does not create an exception for cashing out your 401(k) after leaving an employer. ![]() However, if your employer offers particularly good terms, or if you are late in your career, this can be a solid choice. ![]() If you are early in your career, this is rarely a strong option mostly because you don’t want to leave a trail of under-funded accounts in your wake. The result is that leaving your 401(k) in place with a former employer is situationally useful. Plans like this are rarely a good option for retirement savers. However, even then they may apply onerous terms such as high maintenance fees and access restrictions. If you have more than $5,000 in your account, many employers will allow you to keep your account in place. This comes without penalties, since an IRA is structurally similar to a 401(k) in terms of tax benefits. Instead they can roll your 401(k) into an IRA. If you have between $1,000 and $5,000 in your account, the IRS allows your employer to automatically remove you from their plan but they can’t cash you out unless you request it. Your employer will withhold income taxes, but you will not pay early withdrawal penalties as long as you place this money into a qualified retirement plan, generally an IRA, within 60 days. In this case you will receive a check for the account balance. If you have less than $1,000 in your account, the IRS allows your employer to automatically cash you out of its plan. If you have a relatively small amount of money in your account, some employers will close out your 401(k) automatically when you leave. Most companies use an outside financial firm to manage their 401(k) accounts, so your ongoing relationship would be with that firm rather than with your former employer. And the existing account manager will continue to oversee these investments. You can make changes to the assets based on the rules and preferences of this specific 401(k) account. It will grow based on its underlying investments. You will not be able to make future contributions to this specific account, but the investment portfolio will otherwise continue as normal. Many employers allow former employees to leave 401(k) accounts invested in the company’s plan. It may seem odd, but you can choose to do nothing. Inaction Can Lead to Automatic Cashing Out A financial advisor can offer you valuable insight and guidance on handling tax-advantaged accounts. This works fine most of the time, but in an era when people change jobs far more often than they used to it also has created some confusion. What do you do with this account, that’s supposed to grow over decades, when you change employers? There are a few common options. The IRS established the 401(k) as a tax-advantaged plan for employees, rather than the self-employed.
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