Need to Know: Your 401 (k) Options when you leave your job

Robin Weingast 401kThe new year often means a career change for many people. But what does a new job mean for your retirement plan? Here’s what you need to know about changing jobs and your employer-sponsored retirement plan.

Typically you have four options – you can leave your money in its account, transfer it to an IRA, move it to your new employer’s plan, or cash out. Each option has implications for your finances, so here are some more details on each one:

Transfer into an IRA
This is an easy option that provides a few key advantages, most notably:

• You avoid taxes and penalties, which means your savings doesn’t take a hit
• You preserve your tax benefits
• Your savings become easier to manage – you’ll have fewer statements, and when it comes time to take your Required Minimum Distributions, you will have a centralized source.
• If you elect to transfer into a Roth IRA, you will avoid RMDs – you can withdraw at your own pace, which is particularly appealing if you anticipate having multiple sources for your retirement income.
• Your investment assortment may grow, since IRAs tend to offer more investment options than a traditional 401 (k).
However, be mindful that if you have company stock in your 401 (k) that has increased in value, then you should explore other options aside from an IRA, since company stocks moved to IRAs are taxed as income when withdrawn.

Keep your savings in your old 401 (k) plan
Many companies will allow you to keep money in your old 401 (k), even after you’ve left. This is certainly an easy option, and it has several key benefits:
• You retain the plan’s investments, fees, and features, plus you buy yourself some time to decide what you’d like to do with your money (all while earning more money)
• You avoid immediate taxation and penalties, and you preserve your tax benefits
• You have the option to transfer your savings at any time – typically once you leave a company, you are free to take distributions whenever you’d like, so you can move your money into a new account at any time.
• If you leave your job in or after the year you turn 55 (50 for public employees such as police and firefighters), you can take penalty-free withdrawals from the account.
You should keep in mind that if you have less than $5,000 in the account, you may not have this option and the plan may automatically roll the money into an IRA. If you have less than $1,000 in the account, you may simply receive a check.

Move your savings to your new employer’s 401 (k) plan
You are not required to move your savings into your new employer’s 401 (k) plan, but it may be the simplest, most streamlined solution for your money. You also benefit from a few key things
• You avoid immediate taxation and penalties
• You preserve your tax benefits
• You may be able to postpone the RMD past age 70 if you are still working
Be sure to fully understand your new plan’s rules, distribution parameters, and fees before you move your savings into a new 401 (k).

Cash out your savings
This seems, on the surface, like an attractive and easy way to access your funds. However, you should know a few things before cashing out your old 401 (k) plan
• The amount you withdraw will also be added to your taxable income, meaning you could lose as much as 49.6% to federal taxes
• You will have less money leftover to reinvest back into a retirement savings option, which will affect your long-term planning
In some cases, you may decide the penalties are worth it – but you should make sure you understand what they are before deciding on the cash out option.

If you have questions about how a job change will affect your retirement plan, then we’re here to help. Contact the Robin S. Weingast & Associates team for more information about how to make the decision that’s best for you.

Need to Know: IRS announces Determination Letter deadlines for Pre-Approved Defined Contribution Plans

Weingast 401k newsQualified Retirement Plans are required to be compliant with current laws and regulations.  The IRS, recognizing that it would be burdensome for Plan Sponsors to re-write their Plan documents every time a new requirement appears, allow Sponsors to comply operationally with any new requirements while only restating their formal Plan documents periodically.  For Pre-Approved Documents such as yours, a formal restatement is required every six years. Your current document must be restated no later than April 30, 2016.

A Pre-Approved Plan Document is one which the IRS has reviewed and confirmed as compliant with current requirements.  It may offer Plan Sponsors the option to choose among different features, but all of the features are IRS-approved.

The IRS recently made several key announcements about Pre-Approved Defined Contribution Plans, including:

– The IRS is in the process of  issuing final approval letters (“opinion and advisory letters”) for Pre-Approved Defined Contribution Plans that were previously restated for the law known as EGTRRA.

– In the period beginning May 1, 2014, and ending April 30, 2016, the IRS will accept applications for individual determination letters from employers restating in the current six-year period.

– An adopting Employer whose Defined Contribution Plan is eligible for the six-year remedial amendment cycle, who adopts by April 30, 2016, a Master & Prototype or Volume Submitter Defined Contribution  Plan that was approved based on the 2010 Cumulative List (i.e., current requirements), will be considered to have adopted the plan within the employer’s six-year remedial amendment cycle.

To read the full announcement from the IRS, click here.

The Plan Documents you received from Robin S. Weingast and Associates, Inc. were drawn up in template form by the software company DATAIR.  DATAIR is in the process of modifying its software to reflect any final instructions from the IRS.  We expect to begin receiving the new software within the next few weeks.

This resource further explains what this may mean for your business.

The Robin S. Weingast and Associates, Inc. team is here to help throughout this process. We will be working with each of our clients to make sure they understand this announcement and comply with IRS restatement requirements in an orderly, painless and timely manner.

If you have any questions, please contact us and we would be happy to assist you!

Sources: IRS, Wolters Kluwer Law & Business, American Society of Pension Professionals & Actuaries, DATAIR