If you are part of the “Great Resignation”, here are some 401 (k) tips

If you’re one of the many workers hoping to find a better position elsewhere, be sure to pay attention to the 401 (k) plan account you’re leaving behind.

According to a recent Bankrate survey, approximately 55% of workers say they will look for a new job next year. Nicknamed the Great Resignation, the hunt for greener pastures reaches the pandemic more than a year and, for many people, works from home, leading some of them to seek greater flexibility and a higher salary. .

While not all employees have a 401 (k) or similar workplace retirement plan, those who do should know what happens to their account when they leave the job and what their options are and are not.

“I know it can be stressful to change jobs, but don’t forget your 401 (k),” said certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

This is what you need to know.

Among the 401 (k) plans that allow participants to borrow money, approximately 13% of savers have a loan against their account, according to Vanguard research. The average loan balance is about $ 10,400.

If you quit your job and still owe it, your plan is likely to require you to pay off the remaining balance fairly quickly; otherwise, your account balance will be reduced by the amount due and will be considered a distribution.

In simple terms, unless you can get that amount and enter it into a qualified retirement account, it is considered a distribution that may be taxable. And, if you are under 55 when you leave work, you will pay an early retirement penalty of 10%. (Workers who leave their company when they reach that age are subject to special 401 (k) plan withdrawal rules, more details below.)

If it is initially considered a distribution, you get until the next fiscal year to replace the loan amount, that is, if you leave in 2021, you will arrive until April 15, 2022 to get the funds (or l ‘oc. 15, 2022, if you file an extension). Prior to the major changes in tax legislation that went into effect in 2018, participants only had 60 days.

About a third of the plans allow their ex-workers to continue repaying the loan after leaving the company, according to Vanguard. This is worth checking the policy of your plan.

The first option for managing retirement savings is to leave it in your previous employer’s plan, if allowed. Of course, you can no longer contribute to the plan or receive any kind of employers.

However, while this may be the easiest immediate option, it could lead to more work in the future.

“The risk is that you forget the way,” 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. (By the way, there is legislation pending in Congress that allows for the creation of a “lost and found” database to facilitate the location of lost accounts.)

Also keep in mind that if your balance is low enough, the plan may not allow you to stay there, even if you want to.

“If the balance is between $ 1,000 and $ 5,000, the plan can transfer the money to one [individual retirement account] on behalf of the individual, “Hansen said.” If it’s less than $ 1,000, they can charge you.

“It lives up to the plan.”

The other option is to reverse the balance to another qualified retirement plan. This could include a 401 (k) to your new employer (assuming changes to other plans are accepted) or an IRA.

Note that if you have a Roth 401 (k), it can only be transferred to another Roth account. This type of 401 (k) and IRA involves after-tax contributions, so you don’t get a tax disadvantage like you do with traditional 401 (k) and IRAs. But Roth’s money grows tax-free and not taxed when you make qualified withdrawals along the way.

If you decide to transfer your retirement savings, you will need to make a change from trustee to trustee, where the transfer will be sent directly to the new 401 (k) plan or to the IRA guardian.

Also, while the money you put into your 401 (k) is always yours, the same cannot be said about employers ’contributions.

Purchase times (the time you need to be in a company for your matching contributions to be 100% yours) range from one to six years. Uninvested amounts are usually lost when you leave your business.

There’s something called the 55 rule: if you leave work a year or after you turn 55, you can make distributions without penalty for your 401 (k).

If you transfer money to an IRA, you lose the opportunity to take advantage of the money before the age of 59½, the standard age at which you can generally make withdrawals from retirement accounts without paying any penalties.

Also, if you are the spouse of someone who plans to reverse the 401 (k) balance to an IRA, please note that you would lose the right to be the sole heir to that money. With the job plan, the beneficiary must be you, the spouse, unless you sign a waiver that allows you to be someone else.

Once the money reaches the exchange IRA, the account owner can designate any beneficiary without the consent of their spouse.