What Should You Do With Your Qualified Plan If You Leave Your Employer?

“If you leave your current company, do you understand what to do with your employer-sponsored plan?” Anthony De Santis

If you decide to leave your current position, you’ll need to examine your investment matrix and determine what you want to do with any qualified plan with that company. With your financial advisor, you might discover better places for that money than simply leaving it with the old company.

Let’s look at some of the more popular options available for dealing with your qualified plan when you leave an employer.

Rolling a 401k into an individual retirement account (IRA) might be a good idea for some people. If you think you might forget about your old account, fail to manage it consistently, or don’t like the plan’s investment choices, you could choose to rollover your 401k into an IRA. The most significant advantage of doing a rollover is that you will now have more freedom in your investment choices. An IRA rollover has few limits concerning the kinds of investments you can choose. For example, many people who would like to diversify with “alternative” investments, such as precious metals or real estate, may decide to roll their corporate plans into IRAs. If you choose this type of transaction, you should always seek advice from a financial expert experienced in rollovers. A rollover is a NON-taxable event.

Move your plan money to your new employer. If your new company has a retirement plan, you could directly roll your old plan into another qualified account, such as an individual retirement account. In a direct rollover, you don’t receive the money. Instead, it’s issued in the form of a check payable to your new company’s retirement account. Keeping the check out of your hands helps you avoid getting hit with taxes and early distribution penalties.

Take distributions. If you are at least 59½, you could begin receiving distributions from your former employer’s plan without worrying about penalties. Taking distributions under that age, as you know, will nearly always trigger the 10% penalty for early withdrawal. Once you reach 72, you’ll have to take what is known as “required minimum distributions” (RMD) from your 401k when you leave your employer.

The amount of your RMD is determined by your account’s balance and by your anticipated life span.

Summing it up:

There’s a lot to consider when you leave your employer. Whether you are retiring, getting laid off, or quitting to work for someone else, you will need to decide how to treat your 401k. The closer you are to retirement, the more critical this decision becomes—partner with a retirement and income planner who can help you choose wisely.