by Daniel Kittell | Accounting News, News, Newsletter, Retirement, Retirement Savings
When you retire, you don’t have to move your 401(k) right away, and for many retirees, leaving it where it is could be a smart move. Employers are increasingly adding features that make staying in the plan more appealing. Why? Partly because when employees with large balances leave their money in the plan, it helps lower overall fees for both the company and participants. But before you make a decision, it’s worth understanding your options.
Most Retirees Can Leave Their 401(k) Where It Is
More than half of American workers don’t realize that most plans allow them to leave their 401(k) in place after they stop working.
The key word in that sentence is most. If your balance is under $1,000, your plan may automatically close the account and issue a check. If you don’t deposit that into another qualified retirement account, such as an IRA, it counts as a distribution and may be taxed. You could also incur a 10% early withdrawal penalty.
Additionally, if your balance is under $7,000, your employer may roll it into an IRA for you. Otherwise, your funds can stay put, and you can access it when needed, depending on your plan’s rules.
What’s Changing in 401(k) Plans?
In the past, many plans required retirees to withdraw the full balance or roll it over to an IRA. Now, according to a 2025 Vanguard study, 68% of plans allow retirees to set up installment payments from their accounts (up from 59%), and 43% allow partial, as-needed withdrawals (up from 16%).
These features give retirees more flexibility, but they’re not offered through all plans, so it’s important to check with your plan provider before making a decision to withdraw funds.
Should You Roll Over to an IRA?
Rolling your 401(k) to an IRA may get you a wider range of investment choices, and in some cases, lower fees. But with that flexibility comes responsibility. You’ll need to manage your own money or hire someone to do it for you.
Before moving your money, consider investment options in both accounts, fees (both visible and hidden), your comfort level with managing investments, and whether you anticipate needing regular withdrawals.
Annuities in 401(k)s
Some 401(k) plans now offer annuity options, either directly or through annuity-enhanced target-date funds. These are funds where you choose a target year, usually the year you plan to retire, and at first invest in higher-risk assets, such as stocks. As you get closer to your target year, the fund automatically shifts your money to safer investments, such as bonds.
Annuities offer a steady stream of income for life and peace of mind in retirement planning. On the other hand, they offer less flexibility, often include complex terms, and sometimes have added fees.
There’s No Rush
For many retirees, keeping your 401(k) where it is can be a solid choice, but you don’t need to make a move the day you retire. Take your time. Look at what your current plan offers. Compare it with your IRA options. Consult a financial advisor who can help you come up with a strategy that fits your goals, income needs, and comfort level.
by Jean Miller | Accounting News, News, Newsletter, Retirement, Retirement Savings
At some point in your employment journey, you’re going to find yourself at a crossroads – whether you voluntarily quit a job for a new position or face an unexpected layoff. Amidst the emotional and logistical challenges of these changes, one crucial aspect that requires attention is your 401(k) plan with your former employer. Here’s how to manage your 401(k) plan when employment changes.
Assess Your Options
When you leave your current job, you need to evaluate your available options for your 401(k). Typically, these are your main options:
- Leave it be: In some cases, leaving your 401(k) with your former employer may be a viable option, especially if you’re content with the plan’s performance and fees. This option is often convenient and allows you to maintain the tax-advantaged status of your retirement savings. However, you won’t be able to make additional contributions, and you’ll need to manage the account independently.
- Roll it over into your new employer’s plan: If your new employer offers a 401(k) plan and allows rollovers, transferring your 401(k) to your new employer’s plan would allow you to consolidate your retirement savings, making it easier to manage. Be sure to research the fees and investment options of the new plan before making a decision.
- Roll it over into an Individual Retirement Account (IRA): Transferring your 401(k) funds to an IRA provides more control over your investments and may offer a broader range of investment options compared to employer-sponsored plans. IRAs are not tied to your employer, offering flexibility and portability. Be mindful of fees and investment choices when selecting an IRA provider.
- Cash Out: While it’s possible to cash out your 401(k) when you leave a job, it’s generally not advisable. Cashing out comes with tax consequences, including penalties for early withdrawal if you’re under 59 ½. Additionally, you’ll miss out on the potential long-term growth of your investments.
- Convert it to a Roth IRA: If you’re willing to pay taxes upfront, you can convert your traditional 401(k) into a Roth IRA. You will pay income taxes on the amount converted, but qualified withdrawals in retirement are tax-free. This option may be beneficial if you expect to be in a higher tax bracket in the future.
Understand Tax Implications
When contemplating what to do with your 401(k), it’s important to understand the tax implications that could be triggered. Cashing out, as mentioned, may trigger taxes and penalties. On the other hand, transferring your funds without a direct rollover may result in mandatory withholding. To avoid unexpected tax bills, consider consulting with a financial advisor who can offer guidance based on your personal situation.
Stay Informed About Deadlines
The different options available for your 401(k) are all subject to different deadlines. Missing these key deadlines could limit your choices. Some plans may require you to take action within a certain timeframe, so it’s imperative to stay informed about these deadlines to make the most informed decision possible.
Seek Financial Advice
Navigating the management of a 401(k) plan on top of a job transition can be stressful. A financial advisor will be able to offer valuable insights tailored to your specific circumstances. They can help you weigh the pros and cons of each option and guide you toward a move that aligns with your long-term financial goals.
by Pete McAllister | Accounting News, News, Retirement Savings
No matter the reason for leaving a company, you need to decide what to do with your employer-sponsored retirement plan within 60 days of leaving. If you miss this deadline, you risk the plan being automatically distributed to you or moved to another retirement account. You have several options for your 401(k) plan, and we’ll go over them below.
Keep the Money Where It Is
First, your company should be clear about whether you can keep the funds where they currently are—in your former employer’s plan. Some employers approve this if you have at least a $5,000 balance. You might choose this option simply because you are familiar with the investment options, or because the fees are lower than your new employer’s plan.
Choose a Plan-to-Plan Rollover Option
Many employers offer a plan-to-plan rollover into their 401(k) or other qualified retirement plans. This move doesn’t acquire any tax consequences or penalties. As long as you like the investment options in the new plan, this rollover option can be an obvious choice to keep your savings momentum.
Keep in mind that if you move the money as a withdrawal from the old plan and deposit it to a new plan, rather than choosing the rollover option, your employer may withhold 20% of the sum for taxes. It is your responsibility to report this amount on your taxes for the year the distribution was made.
Roll the Money Over Into an IRA
A direct rollover into an IRA does not incur tax consequences or penalties, and there is an abundance of investment options to choose from—including stocks, bonds, mutual funds, and ETFs. If you typically move jobs intermittently, moving the money into a rollover IRA might be a good option. This way all of your 401(k)s and retirement plans can have one home.
One drawback to this option is that you will no longer be making automatic contributions, so that might curb your savings drive. However, rollover IRAs are commonly flexible, so moving your assets into a future employer’s plan might be an option.
Use the Money
Using the money for personal expenses is an option by taking a lump-sum distribution, but it will cost you. You will owe income taxes on it, and for workers under age 59 ½, you will likely pay a further 10% penalty. Depending on your tax bracket and state and local taxes, you could lose a significant amount of your retirement stash.
Employer Distribution
If your 401(k) balance is less than $1,000, your employer could release the funds via a lump-sum distribution, whether or not you requested it. If this happens and you are within 60 days of terminating your old plan, immediately roll the money into a new employer’s plan or a rollover IRA.
If your balance is more than $1,000 but less than $5,000, your plan administrator is required to move the funds into an IRA unless you specifically request another type of distribution.
In general, according to the Internal Revenue Service (IRS), if your savings is less than $5,000, your employer is permitted to distribute the funds from the plan without your authorization. You should be able to claim on your tax return any taxes or penalties your previous employer triggered when the distribution was made, but it might help to discuss this situation with a tax professional before you file.
