It's Your Money
When you change jobs, the rule of thumb is to get your money out of your former employer's retirement plan. Then what? With the market soft, changing jobs may force you to exit your plan at a low value. However, your new employer's retirement plan may have the same potential for rebound when the market recovers.
Careful decisions now will help you reduce the impact of taxes on your nest egg. When you leave your employer, one option is simply to leave the funds in your old employer's 401(k) plan where they will continue to grow tax deferred. However, if your vested 401(k) balance is $5,000 or less, your employer can require you to take your money out of the plan when you leave the company.
You might want to leave your money in your old employer's 401(k) plan if you like the investment alternatives offered or if you need time to explore other options. You may also want to leave the funds there temporarily if your new employer requires you to wait a certain amount of time before joining their 401(k) plan.
Of course, you might just want to take your funds with you. You can complete a rollover of your retirement earnings one of the following ways:
- direct rollover from your old retirement plan to an IRA
- indirect rollover of old retirement plan to you and within 60 days to an IRA (requires 20 percent mandatory withholding by the Internal Revenue Service)
- direct rollover from old retirement plan to the retirement plan at new employer
- indirect rollover from old retirement plan to you, then from you to the retirement plan at your new employer (requires 20 percent mandatory withholding by the IRS)
"If you will be age 55 or older in the calendar year you separate from a company, you will not pay penalties for a distribution from your 401(k)," says Marty Christopher, CFP®, first vice president for Morgan Keegan. "This is an important distinction if you think you will need access to your money in the next few years. If you move your retirement plan to an IRA, you will be penalized for distributions until you are age 59 -1/2, unless an exception applies."
Taking Stock of Your Company
If you own company stock from your former employer, you may be able to reap tax benefits if you transfer the stock in kind. For example, if the cost basis of the company stock was $10 per share while in the plan and $50 upon your exit, the $40 difference can be taxed at the lower long-term capital gains tax rate. (If the value of the stock went down, it did not appreciate, and, thus, the lower tax rate does not apply.) The $10 per share cost basis will be taxed as ordinary income in the year of distribution.
"Whatever growth the stock experienced in the 401(k) is net unrealized appreciation (NUA)," says Christopher. "Know the tax consequences of your distribution. Once you roll over your 401(k), you cannot undo it to take advantage of NUA."
As always, you should consult a tax advisor concerning your specific circumstances.
Smart Money
Regardless of the economy, there are some important tips for smart long-term investing:
- Pay yourself first, investing the amount to receive the maximum company match, if available.
- Diversify your 401(k) to include other assets in addition to company stock.
- Get help with asset allocation for your 401(k).
- Monitor your 401(k) quarterly.
For advice on how to get the most out of your 401(k), please call 1-866-951-9511 to speak to a Morgan Keegan Financial Advisor.
Investment services are provided through Morgan Keegan & Company, Inc., a subsidiary of Regions Financial Corporation and a member FINRA and SIPC. Securities and insurance products sold through Morgan Keegan are not FDIC insured, not a deposit, not an obligation of or guaranteed by Regions Bank, its affiliates, or any government agency, and may lose value.