New job? Part of your house cleaning may involve consolidating several 401 (k)s.
If you have recently started a new job, it turns out you’re not alone. A Bureau of Labor Statistics report stated that in 2012 the median number of years that wage and salary employees worked in their current job was 4.6 years.
Using that figure one could estimate that an individual might change jobs at least six times in a lifetime, which may mean an individual likely has multiple 401(k) retirement plans. In the haze of starting a new job, keeping track of your personal finance and retirement plans could get confusing or overwhelming but it’s important not to lose sight on your retirement finances. And part of your house cleaning may involve consolidating several 401 (k)s.
If you find yourself with multiple 401 (k) plans, here are some points to consider:
Leaving the J-O-B? If you leave your job (voluntarily or involuntarily), you’ll be entitled to a distribution of your vested balance. Your vested balance includes your own contributions (pretax, after-tax and Roth), any company match, and any investment earnings. It’s important for you to understand how your particular plan’s vesting schedule works because you’ll forfeit any employer contributions that haven’t vested by the time you leave your job. If you’re on the cusp of vesting, it may make sense to wait a bit before leaving if you have that luxury.
Don’t spend it, roll with it! While this pool of dollars may look attractive, don’t spend it unless you absolutely must. If you take a distribution you’ll be taxed at ordinary income tax rates on the entire amount of your account except for any after-tax or Roth 401(k) contributions you’ve made. And, if you’re not yet age 55, an additional 10-percent penalty may apply to the taxable portion of your payout.
Which to choose: 401(k) or IRA?
Presuming both options are available to you there is no right or wrong answer to this question, and there are strong arguments for both options. You need to weigh all of the factors and make a decision based on your own needs and priorities. A professional advisor can assist you because the decision you make may have significant consequences, both now and in the future.
Reasons to roll over to an IRA: You typically have more investment choices with an IRA than with an employer’s 401(k) plan, as you may freely allocate your IRA dollars among different options and you may have more flexibility with distributions. Your distribution options depend on the terms of that particular plan. However, with an IRA, the timing and amount of distributions is generally at your discretion.
You may also roll over your 401(k) plan distribution to a Roth IRA. You’ll have to pay taxes on the amount you roll over (minus any after-tax contributions you’ve made), but any qualified distributions from the Roth IRA in the future will be tax-free.
Reasons to roll over to your new employer’s 401(k) plan: A rollover to your new employer’s 401(k) plan may provide greater creditor protection than a rollover to an IRA. Most 401(k) plans receive unlimited protection from your creditors under federal law. Your creditors (with certain exceptions) cannot attach your plan’s funds to satisfy any of your debts and obligations, regardless of whether you’ve declared bankruptcy. If your distribution includes Roth 401(k) contributions and earnings, you can roll those amounts over to either a Roth IRA or your new employer’s Roth 401(k) plan (if it accepts rollovers).
Armed with these helpful tips, you should feel confident the next time you’re changing jobs knowing this career move will let you retire with more money “in the bank!”
Ray White is a senior vice president of PNC Wealth Management and leads those efforts for Central Florida. PNC Wealth Management has been in Florida for more than 25 years, serving individuals with $1 million or more in investable assets. He can be reached at [email protected]