This week we will discuss four options you have when you leave your job where you had a 401(k) or 403(b) retirement account.

Leave the money where it is.

If the plan of your former employer allows, you can leave your money in the plan. You money will continue to grow tax-deferred but you won’t be able to make future contributions to the account. Some plans may not allow you to leave your money in the plan if your total balance is less than a set amount, such as $5,000. Some plans also limit non-employees in the number of investment options they have in the plan.

Move the money to your new employer’s plan.

If your new company has a 401(k) or 403(b) plan, find out if the plan allows transfers in from other plans. This option also allows your money to continue to grow tax-deferred. And you will be able to make contributions through your new employer.

Move the money into an IRA.

Most mutual fund companies can help you set up an IRA rollover account. This option, like the prior two, allows your money to continue to grow tax-deferred. If your new employer does not have a retirement plan, you can make contributions to your IRA. The mutual fund company will provide you with the rollover application and will take care of coordinating the move with your former employer.

Be sure you select “direct rollover” on the application so the funds are moved directly from the 401(k) or 403(b) account to your IRA. If the funds flow through your hands, you may be hit with income taxes and penalties.

Take the money as a distribution.

Of the four options, this one is the worst. For example, you lose the benefit of tax-deferred growth. You also will have to pay income tax on the entire amount of the distribution. Plus, if you are not yet 59½ years old, you will have to pay a 10% early withdrawal penalty. To put numbers to this, if you have $5,000 in your 401(k) plan and your federal tax rate is 25% and your state income tax rate is 4%, you will pay $1,450 in income taxes. If you are not yet 59½, you will have to pay an additional $500 for the 10% penalty. Consequently, you will end up with $3,050, not $5,000.

Caution: If your former employer matched your contributions, check the plan to see if you are able to take all the match money with you. Some plans require employees to work for the employer a certain number of years before they have full access to the match funds.

Let us know if you have other retirement topics you would like discussed in this blog. Comment on this article or email [email protected].

Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.

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