When someone leaves their employer whether it is at retirement, termination, or a better opportunity, there are important decisions as well as considerations that need to be decided upon concerning their 401k or 403b. This, of course, is obvious. But what are the options available and how will they affect not only the retirement plan but tax implications as well?
You are permitted to transfer the remaining balance into another qualified retirement vehicle. This is usually done by what’s known as a ‘Trustee Transfer’. In some instances, the plan sponsor will issue a check for the balance of the retirement account directly to the individual but it’s important to know that there is a sixty-day window in which to open another retirement account. If the sixty-day window elapses before the rollover is transacted the balance will revert to taxable income. Not a good thing if the balance is large, the recipient is under 59 ½ or both. Any money distributed and not rolled over into another retirement plan is subject to an additional Federal Penalty if the recipient is under the age of 59 ½.
There are exemptions for this, however. If the recipient is age 55 or older when they retire and are no longer working for the company, it is possible that they may not be subject to the 10% Federal Penalty, but this should be verified with the plan holder. If you have an outstanding loan at the time of departure, that will, in most cases, become taxable income to you.
There are a tremendous number of options available when initiating a transfer or deposit into another retirement plan. These plans, by the way, are known in the industry as a ‘Qualified Plan’. In some cases, you can do an internal transfer. This means that you are keeping the investment choices within the same ‘Family’ of funds where the company 401k was managed. This choice should be discussed directly with the plan custodian (the company where the 401k investments are being held) as there may be some subaccounts (accounts that were available for investing within the 401k plan) that may no longer be available for those outside the 401k. There may be similar accounts, however. This can be discussed.
Other Qualified Plans include bank accounts, mutual funds, and Brokerage IRAs that allow investment in stocks. The necessary documents are available from the new entity, so discussing the process with that institution would be in order. It is important to get everything in writing from the institution you decide to work with. Take nothing for granted. When you depart from your current employer certainly talk to the HR Department, but it is strongly advised that you speak to a representative of the plan directly. There are no stupid questions! Again, don’t assume anything the reason being that should something be overlooked you will be the person held responsible by the IRS. Misunderstandings or ignorance could literally cost thousands of dollars in taxes.
Keep in mind that all retirement plans must begin taking what’s known as Minimum Required Distributions at age 70 ½. The plan administrators will guide you here as to what that figure could be. You may, of course, begin taking money before that age. It is important to keep your spouse informed so there are no unwanted surprises in the event of unforeseen events or tragedies. I cannot overstate the importance of these discussions as they can, if left to chance, have severe negative outcomes for a surviving spouse.