Take Your 401(k) and Roll It

Reprinted from PN/Paraplegia News April 2013

If you wonder what to do with your 401(k) plan, it's important to understand your options.

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If you’ve lost your job or are changing jobs, you may be wondering what to do with your 401(k) plan. It’s important to understand your options.

What You’ll Get

If you leave your job (voluntarily or involuntarily), you’ll be entitled to a distribution of your vested balance of your plan.

Your vested balance always includes your own contributions (pretax, after-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions (and earnings) that have satisfied your plan’s vesting schedule.

In general, you must be 100% vested in your employer’s contributions after three years of service (“cliff vesting”), or you must vest gradually, 20% per year until you’re fully vested after six years (“graded vesting”).

Plans can have faster vesting schedules, and some even have 100% immediate vesting. You’ll also be 100% vested once you’ve reached your plan’s normal retirement age, or in some cases if you become permanently disabled. 

It’s important to understand how your particular plan’s vesting schedule works.

You’ll forfeit any employer contributions that haven’t vested by the time you leave your job. Your summary plan description (SPD) will spell out how the vesting schedule for your particular plan works. If you don’t have one, ask your plan administrator for it. If you’re on the cusp of vesting, it may make sense to wait a bit before leaving, if you have that luxury.

Don’t Spend It

While this pool of dollars may look attractive, don’t spend it unless you absolutely need to.

If you take a distribution, you’ll be taxed, at ordinary income tax rates, on the entire value of your account except for any after-tax or Roth 401(k) contributions you’ve made. And, if you’re not yet age 55, an additional 10% penalty may apply to the taxable portion of your payout.

However, if you are permanently disabled, the 10% early withdrawal penalty will not apply. Special rules may apply if you receive a lump-sum distribution and you were born before 1936, or if the lump sum includes employer stock.

If your vested balance is more than $5,000, you can leave your money in your employer’s plan until you reach normal retirement age. But your employer must also allow you to make a direct rollover to an IRA or to another employer’s 401(k) plan.

As the name suggests, in a direct rollover the money passes directly from your 401(k) plan account to the IRA or other plan. This is preferable to a “60-day rollover,” where you get the check and then roll the money over yourself, because your employer has to withhold 20% of the taxable portion of a 60-day rollover.

You can still roll over the entire amount of your distribution, but you’ll need to come up with the 20% that’s been withheld until you recapture that amount when you file your income tax return.

Employer’s Plan or IRA?


There are strong arguments to be made on both sides when looking to move your 401(k) in a new employer’s plan or moving it to an IRA.

It’s best to have a professional assist you with this, since the decision may have significant consequences.

Reasons to roll over to an IRA:

- You typically may freely move your money around to the various investments offered by your IRA trustee, and divide up your balance among as many of those investments as you want.

- You can freely allocate your IRA dollars among different IRA trustees/custodians. This gives you flexibility to change trustees often if you are dissatisfied with investment performance or customer service.

- An IRA may give you more flexibility with distributions. The timing and amount of distributions is generally at your discretion (until you reach age 70).

- You can roll over your plan distribution to a Roth IRA. You’ll have to pay taxes on the amount you roll over, but any qualified distributions from the Roth IRA in the future will be tax free.


Some reasons to roll over to your new employer’s plan:

- If you roll over your retirement funds to a new employer’s plan that permits loans, you may be able to borrow up to 50% of the amount you roll over if you need the money.

- A rollover to your new employer’s plan may provide greater creditor protection than a rollover to an IRA. Most 401(k) plans receive unlimited protection from your creditors under federal law. Your creditors (with certain exceptions) can’t attach your plan funds to satisfy your debts, regardless of whether you’ve declared bankruptcy.

- You may be able to postpone required minimum distributions. For traditional IRAs, these distributions must begin by April 1 following the year you reach age 70. However, if you work past that age and are still participating in your employer’s 401(k) plan, you can delay your first distribution from that plan until April 1 following the year of your retirement.

When evaluating whether to initiate a rollover, always be sure to (1) ask about possible surrender charges that may be imposed by your employer plan or new surrender charges that your IRA may impose, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.

Contact: / 866-760-3544 /  


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Take Your 401(k) and Roll It


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