What A Job Change Means For Your Retirement Account

Unfortunately, in this geographic region we see many companies still cutting back, laying off employees or simply closing up shop. If this is your employer and you are not actually retiring but merely changing jobs, you may wonder what options you have for the retirement savings you have accumulated while with that employer.

The first thing to consider is the type of retirement plan you have ie. 401(k), pension plan, cash balance plan, savings plan, etc. However, if your company-sponsored plan is a traditional pension, 401(k), savings plan or cash balance plan, you are eligible to rollover the portion in which you are vested. A traditional pension plan may allow for a lump sum benefit which is outlined in the summary plan document. If your account balance is under $5,000, many employer plans will automatically distribute the check to you and perform the necessary withholding. For account balances larger than $5,000, all vested pre-tax contributions to your retirement plan are eligible for rollover. This means that you can establish an IRA rollover account with a financial institution of your choice, which can be any investment firm, broker, or bank that will accept a rollover distribution. Once your new account is established the receiving institution will forward a signed direct rollover form to the investment company that has custody of the employer’s plan. This avoids the 20% withholding penalty should you actually withdraw the proceeds. Typically, the check is sent directly to the new investment account without ever going to the employee. However, on occasion, the check may actually be sent to the employee but should not be payable to him or her. It should be payable to the IRA account for the benefit of (FBO) the employee. Should the check be made payable directly to the employee, 20% will be withheld for prepayment of federal income taxes. Under this scenario, you still have the option to get the money into an IRA rollover by issuing a check to the IRA rollover custodian but the transaction must be completed within 60 days. The safe rule of thumb is to perform the transaction as a direct rollover to avoid costly mistakes. By rolling over your pre-tax account, you are able to maintain the tax-deferred growth on the assets, as well as avoid current taxation and possible penalty if you are under age 59 ½.

If you have after-tax dollars invested in your company’s retirement plan, they are not eligible for rollover and a check will be issued directly to you. Do not commingle this check with your pre-tax account. Distributions from IRA rollovers are subject to federal income tax and you would be accountable for knowing what portion has already been taxed.

Depending on your new employer’s retirement plan, you may even be eligible to roll your old 401(k) into the new one offered. (Transferred balances are not entitled to a company match contribution.) This option depends on the particular plan and is generally not recommended since you are then limited to the investment options within the plan itself. An IRA rollover account severs the relationship between your former employer and your retirement plan, in addition to significantly opening your choices of investment to virtually the entire universe of mutual funds, stocks, bonds, etc.

Although the rollover process is not a particularly difficult one, it can be extremely costly if not done correctly. If you are facing an employment change in the future or have gone through one already, it is crucial you meet with a trusted advisor to review your options and ensure you maximize the efficiency of your hard earned savings.