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Leave the money or move it?
The first decision for your retirement savings is to leave it in your former employer’s plan, if permitted. Of course, you can no longer contribute to the plan or receive any employer match.
However, while this might be the easiest immediate choice, it could lead to more work in the future.
“The risk is that you are going to forget about it down the road,” said Will Hansen, executive director of the Plan Sponsor Council of America.
Basically, finding old 401(k) accounts can be tricky if you lose track of them. (There is, incidentally, pending legislation in Congress that would create a “lost and found” database to make locating lost accounts easier.)
Also be aware that if your balance is low enough, the plan might not let you remain in it even if you want to.
“If the balance is between $1,000 and $5,000, the plan can transfer the money to an [individual retirement account] in the name of the individual,” Hansen said.
“If it’s under $1,000, they can cash you out,” he said. “It’s up to the plan.”
The risk is that you are going to forget about [the account] down the road.
Will Hansen
Executive director of the Plan Sponsor Council of America
Your other option is to roll over the balance to another qualified retirement plan. That could include a 401(k) at your new employer — assuming rollovers from other plans are accepted — or an IRA.
Be aware that if you have a Roth 401(k), it can only be rolled over to another Roth account. This type of 401(k) and IRA involves after-tax contributions, meaning you don’t get a tax break up front as you do with traditional 401(k) plans and IRAs. But the Roth money grows tax-free and is untaxed when you make qualified withdrawals down the road.
If you decide to move your retirement savings, you should do a trustee-to-trustee transfer, where the balance is sent directly to the new 401(k) plan or IRA custodian.
Also, while any money you put in your 401(k) is always yours, the same can’t be said about employer contributions.
Vesting schedules — the length of time you have to stay at a company for its matching contributions to be 100% yours — range from one year up to six years. Any unvested amounts generally are forfeited when you leave your company.
Outstanding loans
Among 401(k) plans that allow participants to borrow money, roughly 13% of savers have a loan against their account, according to Vanguard research. The average loan balance is about $10,400.
If you leave your job and still owe, there’s a good chance your plan will require you to repay the remaining balance fairly quickly; otherwise, your account balance will be reduced by the amount owed and considered a distribution.
In simple terms, unless you are able to come up with that amount and put it in a qualifying retirement account, it is considered a distribution that may be taxable. And, if you are under…
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