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Changing Jobs? Don’t Forget About Your 401(k)!

Changing Jobs? Don’t Forget About Your 401(k)!

February 15, 2022
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Americans left their jobs at an alarming rate last year. According to the
U.S. Bureau of Labor Statistics, a total of 68.9 million workers resigned,
were laid off or discharged in 2021,1
including more than 47 million who
left voluntarily in what came to be known as the Great Resignation.2 The
good news is that the majority of those who left a job remained in the
workforce. In fact, 75.3 million workers were hired last year for a net
employment gain of 6.4 million in what some economists are calling the
“Great Upgrade.” While many workers left the labor market to care for
children or elderly relatives during the pandemic, millions left their former
jobs for better pay, benefits, working conditions and job quality.3
However,
it appears that the “Big Quit” may not be over yet. According to a recent
survey of American workers, roughly one quarter of respondents say they
intend to change jobs in 2022, possibly setting the stage for yet another
year of turmoil in the labor market.4
If you’re among the millions of Americans who recently changed jobs or
are thinking about doing so in the months ahead, it’s important to
understand how a move could impact your retirement plan benefits. For
example, if you leave a job before your 401(k) is fully vested, you may
forfeit the unvested portion of your account. Vesting refers to the amount
of employer matching contributions that employees are entitled to keep,
based on the plan’s vesting schedule. Eventually, you’ll also need to
decide what to do with your old 401(k). Generally, you can choose one of
four options:
1. Leave your retirement account at a former
employer
If you’re happy with the plan’s investment options and fees, you can leave
your retirement account where it is and continue to benefit from taxdeferred earnings growth as long as the account balance remains at or
above that employer’s required minimum balance—usually $5,000. You
will be limited to the plan’s investment options and will not be eligible to
take a loan against your old 401(k) plan. If you have an outstanding
401(k) loan, your old employer may require the loan to be repaid within a
stated time period after you terminate your employment. If you fail to pay
back a 401(k) loan, it's considered to be a distribution and may be subject
to taxes and penalties. A potential downside to leaving assets at a former
employer is that the account may fall off your radar. You may forget to
check on it regularly or take steps to ensure your investment allocation
continues to align with your needs, risk tolerance or changing priorities.
Your allocation refers to how account assets are invested across individual
investments and asset classes, such as stocks, bonds and cash.
2. Roll the account assets into your new employer’s
plan
If your new employer offers a plan and accepts rollovers, you can roll the
account assets from your old plan directly into your new employer’s plan.
This option enables you to consolidate your 401(k) assets in a single
account and continue to enjoy the benefits of tax-deferred growth as you
build your retirement savings. However, you will be limited to the
investment choices offered by the plan and subject to the new plan’s fee
schedule and provisions, including those governing loans and any
matching contributions. A financial professional can help you make an
informed decision by providing a side-by-side comparison of the
investments and fees associated with both plans. Another benefit of
keeping assets in a 401(k) at a new or former employer is that retirement
accounts set up under the Employee Retirement Income Security Act
(ERISA) of 1974 are generally protected from seizure by creditors.5
3. Roll account assets into a traditional IRA
Another option is to roll account assets into a new or existing traditional
IRA through a trustee-to-trustee transfer or “IRA rollover.” Your account
assets will continue to benefit from tax-deferred earnings growth, and you
can make contributions to your IRA, subject to the
annual contribution limits ($6,000 for 2022 and an additional $1,000 in
catch-up contributions, if you are age 50 or over). However, you may not
be able to deduct all of your traditional IRA contributions if you or your
spouse participates in another retirement plan at work.6
A traditional IRA
may also offer certain investment choices that are not available in your
former employer’s plan or in your new 401(k) plan. Keep in mind, IRAs do
not have a loan feature and do not provide the same level of creditor
protection as 401(k)s.
4. Take a cash distribution
Due to the significant penalties associated with early withdrawals from
qualified retirement plans, it can be costly to take a cash distribution if you
are under age 59 ½. That’s because the Internal Revenue Service
considers it an early distribution, meaning you could owe the 10% early
withdrawal penalty in addition to any federal, state and local taxes owed,
which can add up fast. Another significant cost associated with cash
distributions at any age is opportunity cost. For example, if you took
$10,000 out of your 401(k) instead of rolling it over into an account
earning 8% annually on a tax-deferred basis, your retirement fund could
end up more than $100,000 short after 30 years. 7 That could have an
impact on your retirement timeline, resulting in retiring later than originally
planned or falling short of your retirement income goals. Keep in mind, if
you take a cash distribution and then decide to roll it over into another
retirement plan, you only have 60 days from the date you received the
distribution to complete the rollover before owing taxes and penalties.
The information above is not a complete list of the rules, restrictions and
penalties associated with each of these choices. It’s important to discuss
all of your options with your plan provider, as well as your tax and financial
professionals to determine the right course of action for you. Remember,
the choices you make today can impact your finances for decades to
come.
To learn more about planning for a confident retirement, call the office to
schedule time to talk (803) 736-3406 or email to setup a meeting to see how we can help Zach@milestonewealthadvisors.com 


1 http://www.bls.gov/news.release/jolts.nr0.htm
2 http://www.uschamber.com/workforce/understanding-americas-labor-shortage-themost-impacted-industries
3http://rooseveltinstitute.org/2022/02/04/%E2%80%8B%E2%80%8Bthe-laborleverage-ratio-a-new-measure-that-signals-a-worker-driven-recovery/
4 http://www.resumebuilder.com/1-in-4-workers-plan-on-quitting-in-2022-as-greatresignation-continues/
5 http://www.equifax.com/personal/education/life-stages/creditors-protectedretirement-accounts/
6http://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-iracontribution-limits
7 http://www.finra.org/investors/learn-to-invest/types-investments/retirement/401kinvesting/401k-rollovers
This information was written by KRW Creative Concepts, a non-affiliate of the
Broker/Dealer.
Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor
should consider various factors including, but not limited to, investment options, fees
and expenses, services, withdrawal penalties, protection from creditors and legal
judgments, required minimum distributions and possession of employer stock. Please
view the Investor Alerts section of FINRA website for additional information.