VOL. 129 | NO. 76 | Friday, April 18, 2014
Rays of Wisdom
Dana and Ray Brandon
Understanding Job Change and Your 401(k)
By Ray and Dana Brandon
Ray’s take: A recent CareerBuilder survey shows that one in five workers said they plan to change jobs this year or next.
If you’re thinking of changing jobs, there are some very important things you need to consider regarding your 401(k). Making smart decisions now could save you thousands in employee matching funds, taxes and potential penalties.
Your current employer’s vesting schedule is something you need to investigate. You can always take your own 401(k) contributions with you when you leave a job, but you won’t be able to keep your employer’s match or profit sharing contributions unless you are vested in the plan. Check to see when you will be fully vested. If you are close to the vesting date, it would be financially in your favor to stay until you can take your employer contributions with you.
A common mistake made when you leave a job can cost you. If you take your 401(k) in cash rather than transferring it to another qualified plan, you could incur some pretty stiff penalties. Your plan administrator will remove 20 percent right off the top for taxes, and then, if you are under 59½, when you file your income taxes, you will owe an additional 10 percent. That’s a big piece of your 401(k) pie lost. An existing loan to your plan can further complicate your options.
Your best options are to: roll your existing 401(k) from your former employer to your new employer; roll it to an IRA; or leave it with your former employer – usually in that order. 401(k) plans have more flexible distribution options than IRAs; and once they have moved to IRA status, you can’t go back.
Each of these options has benefits and drawbacks. You should choose the option that works best for your individual circumstances and consult a tax adviser or your financial planner for more information.
Dana’s take: When the economy was shaky, you may have chosen to remain in a less-than-fulfilling job for safety’s sake. Now that the employment market is improving, you may be considering looking for a new job or striking out in your own venture.
However you plan to work, make sure that a 401(k) is a part of your plan. Gone are the days of gold watches and lifetime pensions. Today, retirement means every man for himself. If numbers aren’t your strength and you don’t understand what a 401(k) is, do research online or make an appointment with a tax adviser or financial planner.
Knowledge is power. Use it to create the life you want to live. Every dream deserves a plan.
Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at email@example.com.