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July 1, 2020
If you’re leaving one job and moving to another, or if you’ve lost or quit a job, there’s a decision to make. Should you keep your money in your ex-employer’s retirement plan, or should you move it? The answer lies in whether the old plan is performing well, or whether you’d be better off cutting ties.
Here are three things to consider before you take a leap.
There’s something to be said for sticking with a good thing. If you’re happy with your ex-employer’s plan, there’s no reason to cut those ties and move on just for the sake of it. Taking your money out and moving it elsewhere should be based on getting a better deal, not just starting fresh with a different plan. Different doesn’t always mean better.
On the other hand, this could be a perfect time to make your break from a bad plan. You probably already know that withdrawing money without reinvesting it into another retirement plan can saddle you with taxes and penalties. It is important to do a proper 401(k) rollover.
But, if you have a new employer and the plan is better, then that’s one logical place to safely make a move. If not, you still have the option of closing out the old plan and moving your money into an IRA.
There’s a “magic” age range that falls between 55 and 59 ½, explains Dan Caplinger for Daily Finance. If you want to leave an old 401(k) plan, and if you fall within that span, you might not incur any penalties at all for simply withdrawing. There’s one other stipulation: you must have lost or quit your job after age 55 to qualify for the no-penalty deal.
This age range is also special because pulling your money from a 401(k) and putting it into an IRA means you forfeit your right to no penalties for withdrawal until you reach the age of 59 ½. If you withdraw from your 401(k) after age 55 without penalty, and then move it to an IRA, you will incur a 10 percent penalty for future withdrawal until you turn 59 ½.
If you own company stock, there are a couple of ways to approach your 401(k). The first way is taking a withdrawal. If you choose that route, you could have a very favorable tax and penalty situation. You’ll only pay penalties and taxes on what you paid for the stock, and not on what it’s worth now, according to Caplinger. Also, taxation on the current value is deferred, as long as the shares are held in a taxable account. When you do eventually have to pay taxes, you’ll have the long-term capital gains rate.
Another option is taking the withdrawal and placing it into an IRA or simply leaving your 401(k) alone altogether. With either of these choices, you won’t pay any tax now. But later, you’ll be taxed at your regular rate.
Change can be a good thing. Moving your money from one retirement plan and into another could open up new possibilities, including lower costs. If you’re not happy with the plan you’ve got, leaving a job is a logical time to take your money with you.
Closing out a retirement plan is a major decision, and one that you shouldn’t take on lightly. Be sure you’re moving to a better situation, and not just a different one. If the grass really is greener, then there’s no better time to move ahead. But if it’s not, the safer choice might be to let a good thing keep working for you.
Learn more about the pros and cons of rollovers here.
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