Your 401(k) Benefits When you Change Jobs

April 4th, 2008 at 08:05am John Schissel

  John D. Schissel, QPA, CPC 

It is now common for an employee to work for as many as seven employers before retirement. After a person leaves an employer a critical decision is what to do with their 401(k) balance which is the sum of the employee’s contributions, employer match and profit sharing contributions and investment gains. A key to a financially successful retirement is to keep your assets accumulating on a tax deferred basis and there are three government approved options available to you:

• Transfer your assets into your new employers plan when you become eligible
• Transfer your assets directly into an Individual Retirement Account (IRA)
• Leave your assets in your prior employer’s plan.

When you exercise the option to transfer the assets it is called a Rollover. Under both of these options your contributions and investment earnings maintain their special tax sheltered status and you do not have to pay taxes or penalties. The decision of which to choose can be based on the range of investment options available, fees and consolidation to reduce paperwork.

If an individual elects to have the account balance paid to them directly, they will be subject to current taxation and if less than age 59 ½ they could be subject to an additional 10% excise tax. This decision also means the long term loss of tax deferred investment gains.

The opportunity to save is difficult to start with and having assets in a tax deferred arrangement is wonderful. These dollars should be protected and allowed to grow as long as possible. Let it ride.  

Entry Filed under: Financial Planning, Investments