Switching jobs or retiring from the military? If you contributed to TSP or have a 401(k) plan at the job you're leaving, it's a good time to review your financial decisions and choices linked to it — a process that's much easier if you understand the options.
There are four workable opportunities for continuing the growth of retirement funds. You can leave it where it is, if you're switching jobs and have TSP you can roll the funds into TSP, you can roll them over to the new employer’s plan or create an individual account of your own. A fifth option — cashing out the account — involves early withdrawal penalties, tax implications and loss of any long-term growth. Figuring out which route offers more advantages for continued investment is the first step.
If you read the Summary Plan Document (SPD), you know that some employer plans accept rollovers, others may not. Plan sponsors maintain the membership guidelines. TSP accepts rollovers, including after you've left the military.
In some cases, the former employer’s plan allows the sponsor to cash-out the account, usually if the balance is low, when you end employment. These distributions could trigger income taxes and a 10 percent penalty. You can avoid the taxes and penalty if you deposit the entire balance of the employer plan, not the amount of the check, in an IRA within 60 days of the distribution.
Before you start, gather account documents (statements) and the plan contacts together. Determine what type of contributions you made which are either pre-tax or Roth contributions. These contributions are treated differently.
- Pre-tax contributions are not taxed when made, but are taxed when withdrawn
- Roth contributions are made with dollars that have been taxed and withdrawals are not taxed
It’s a good idea to talk with a financial advisor before starting the process. First, you want to choose the right type of retirement account and secondly avoid paying taxes or penalties for choosing the wrong plan. For example, if you roll the pret-tax 401(k) contributions into a Roth IRA, prepare to pay taxes on the full amount of the roll-over.
Have your financial advisor review the previous employer’s plan and weigh the benefits of the new employer’s retirement plans (or do it yourself).
If you leave the money in the previous employer’s plan, it’s a good idea to review the plan’s investment options. If you decide to move the funds, the previous plan’s administrator can send the check to a designated contact.
When determining whether to roll the funds to a new 401(k) or an IRA consider the following.
- 401(k) plans traditionally offer pre-selected groups of funds (although some plans offer a "broker's window").
- An IRA allows you to invest in many things including stocks, mutual fund, bonds and Exchange Trade Funds (ETF).
Make sure you know how much money you actually "own". Depending on the length of the previous employment, you need to check the vesting schedules. The schedules determine the amount and date when the employer’s contributions are legally yours. Your own contributions and the earnings on them are fully vested from day one.
Age is another factor to consider. Sometimes, if you switch jobs and turn 55 in the same year (or are already 55 or older), you may withdraw funds from the 401(k) without penalty. Rolling the funds into another 401(k), TSP or IRA imposes a higher age limit of 59 1/2 years to avoid withdrawal penalties, depending on the plan. If this applies to you, you might want to contact a financial advisor.
Your new employer may have a waiting period before you can rollover the funds or contribute to the employer's plan. You may want to open a retirement account, like and IRA, if you are qualified, to continue contributions during the waiting period.
Opening another account may allow you to take advantage of the tax deduction until you make your final decision. Keeping the investment growth active could be more beneficial for you in the long run.
You’ve saved for retirement using an employer’s plan. A financial advisor can help you understand the regulations of moving the retirement funds. They will also help navigate any future changes.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.