Know your 401(k) options Article Courtesy of Nancy Harris, CMFC, CDFA President, LPL Financial Planner, New Foundation Wealth Group
If you've lost your job, or are changing jobs, you may be wondering what to do with your 401(k) plan account. It's important to understand your options.
What will I be entitled to?
If you leave your job (voluntarily or involuntarily), you'll be entitled to a distribution of your vested balance. Your vested balance always includes your own contributions (pre-tax, after-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions (and earnings) that have satisfied your plan's vesting schedule.
It's important for you to understand how your particular plan's vesting schedule works, because you'll forfeit any employer contributions that haven't vested by the time you leave your job. Your summary plan description (SPD) will spell out how the vesting schedule for your particular plan works.
Should I roll over to my new employer's 401(k) plan or to an IRA?
Assuming both options are available to you, there's no right or wrong answer to this question. It's best to have a professional assist you with this, since the decision you make may have significant consequences—both now and in the future.
Reasons to consider rolling over to an IRA:
• You generally have more investment choices with an IRA than with an employer's 401(k) plan.
• You can freely allocate your IRA dollars among different IRA trustees/custodians.
• An IRA may give you more flexibility with distributions.
You can roll over (essentially "convert") your 401(k) plan distribution to a Roth IRA. You'll generally have to pay taxes on the amount you roll over (minus any after-tax contributions you've made), but any qualified distributions from the Roth IRA in the future will be tax free.
Reasons to consider rolling over to your new employer's 401(k) plan (or stay in your current plan):
• Many employer-sponsored plans have loan provisions.
• Employer retirement plans generally provide greater creditor protection than IRAs.
• You may be able to postpone required minimum distributions.
• If your distribution includes Roth 401(k) contributions and earnings, you can roll those amounts over to either a Roth IRA or your new employer's Roth 401(k) plan (if it accepts rollovers). If you roll the funds over to a Roth IRA, the Roth IRA holding period will determine when you can begin receiving tax-free qualified distributions from the IRA.
When evaluating whether to initiate a rollover always be sure to (1) ask about possible surrender charges that may be imposed by your employer plan, or new surrender charges that your IRA may impose, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
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