Contributions to a 401(k) can stop for a variety of reasons. You may have been laid off or fired or left your job voluntarily. You could also choose to stop your 401(k) contributions while still employed with the company, with no penalty for doing so. What happens to your 401(k) after you stop adding to it may be largely up to you, depending on the amount in your account. Feel free to speak with our knowledgeable agent about your options.
What Are My Options If I Leave My Job & Stop Adding To My 401(k)?
After you leave your job, there are several possibilities for what to do with your 401(k). Your options may include the following.
Leave Your 401(k) With Your Former Employer
If you have more than $5,000 invested in your 401(k), the plan should allow you to leave your account where it is after leaving the company. This may be a good option if you like your plan portfolio. You can continue to manage the funds as you had been doing before your employment was terminated.
Roll It Over To A New Employer
If you have left one position and begun a new one, your new employer may offer a 401(k) plan. Find out when you will become eligible to participate. Some employers require a certain length of service before employees can enroll in a retirement savings plan.
Once you are enrolled in a plan with your new employer, it should be a simple matter to roll over your 401(k). You can request a direct transfer from custodian to custodian to avoid the risk of owing any taxes. If you elect to receive the balance of your account in the form of a check, you must deposit the funds into your new 401(k) within 60 days, or you could owe income tax on the entire balance. Make sure your new 401(k) account is set up, active, and ready to receive contributions before you close out your old account.
Roll It Over Into An IRA
If your new employer does not offer a retirement plan, or you don’t have a new employer, you can roll your 401(k) into an IRA. You will need to open an account with a financial institution of your choice. A major advantage of an IRA is the freedom to invest exactly as you like. There are very few limits on IRA rollovers.
Take Distributions (After Age 59 1/2)
If you have left your job to retire, it may be time to start drawing on your retirement savings. You can begin taking qualified distributions from your 401(k) if you are 59 ½ or older. If you take distributions before you reach that age, you will have to pay a 10% tax penalty for early withdrawal. With a traditional 401(k), you must pay income tax on any distributions you take.
Cash It Out
If you are 59 ½, you can cash out your 401(k) account in a lump-sum distribution, with no 10% tax penalty for early withdrawal. However, the tax burden may not be worth the influx of cash. You will have to pay income tax on the entire amount. If you are not yet 59 ½, you will also have to pay the 10% penalty.
September is Life Insurance Awareness Month.
It’s the perfect time to remind ourselves to plan ahead for the ones we love.