Published: February 2015
If you’ve done a bit of job hopping, you’re not alone. The median number of years people stay with an employer is only 4.6 years, according to the U.S. Bureau of Labor Statistics.
That also means you've likely participated in a number of retirement plans. Each time you've packed up your things and said your goodbyes, you've also had to make decisions about what to do with the money you've accumulated in the company's 401(k). Here's a review of your options, with four choices you can mull over when the time comes to leave your next job:
You may be able to keep your 401(k) with your old employer, says the Financial Industry Regulatory Authority (FINRA), an independent regulator for U.S. securities firms. You won’t be able to make new contributions to the plan (or receive a company match), but you may want to keep the plan if it has provided strong returns with reasonable fees, the agency says. However, the details on whether you qualify to stay on the plan, and how the plan will function once you leave the company, will vary, so talk with your old employer before you decide. A perk of this option: You can still move your money to a 401(k) or some other tax-deferred account at a later time, according to FINRA.
You may also choose to transfer your 401(k) to your new company’s plan. Depending on your employer, and the type of plan you choose, this option offers the potential for regular, pre-tax contributions and employer matching. Moving your 401(k) to your new company's plan also allows you to consolidate your retirement funds into a single account, rather than leave a trail of plans whenever you part ways with an employer. Once you move your money to a new 401(k), though, you won’t be able to move the funds again until you switch jobs, says FINRA.
If your new employer doesn’t offer a retirement plan, you can still move your money into a tax-deferred account like an individual retirement account (IRA). You can ask your old plan administrator to do a "direct rollover," transferring funds directly into an IRA for you. Or, you can do it yourself and have the funds paid out to you (what’s known as an "indirect" rollover). If you choose the latter, your old company will be required to withhold 20 percent and you’ll only have 60 days to get the funds into an IRA, according to the Internal Revenue Service. If you complete the rollover within the set time period (and with the full balance of your original 401(k)), you can recover the 20 percent when you file your taxes for the year, says FINRA.
While this option may seem simplest—you just ask your plan administrator to write you a check for the amount in your 401(k)—it’s also the least appealing. That’s because you’ll not only be cashing out money you had designated for retirement, you’ll also be taking a big tax hit on the funds. Your employer will have to withhold 20 percent as an “early tax payment,” and, depending on your age, you may also face a 10 percent early-withdrawal penalty from the IRS, and additional taxes from federal, state and local authorities, says FINRA. Bottom line: You may end up with a lot less money than you expect.
Contact your financial professional or an Allstate agent to learn more ways to plan and save for retirement.