Keeping your Nest Egg when Changing Careers
Whether you decided to embark in a career change, or it was forced upon you by a lay-off, keeping your nest egg intact is a question all encounter. Knowing what will happen to your retirement 401k plan is extremely important, and these steps can help keep your plan full.
Many taxes and penalties that come with leaving a company may reduce the amount you have saved in your retirement 401k plan. To prevent that, careful attention is needed, along with these tips for keeping your nest egg intact during a career change.
Find out if you are vested
All the money that you deposit into a 401k still belongs to you after a layoff, but you can only keep the money that your company contributed if you are vested.
Make your move
You have several options to maintain the tax-deferred benefits of your 401(k) when you leave a job:
- You can keep the money in your old employer’s plan
- roll it into another tax-deferred account such as an IRA
- ransfer your balance into a new 401k when you land your next position
Avoid transfer penalties
To do this, have your old company transfer your 401k savings into an IRA or a new company’s retirement plan. If you attempt to change it over yourself, you risk countless fees, especially if you are changing careers under the age of 55.
Consider your age
A 10% withdrawal penalty fee is given to any account that tries to take funds out of an IRA before the age of 59. In 401k plans, the age is 55. Keep your money in your funds for as long as you can when you are changing careers so as to not induce penalties.
Leave employer stock behind
When you hold stock in a company, the stock gets special treatment from taxes. When you are changing careers, those special privileges are gone for the company’s stock. When you withdraw company stock, the original cost of the shares will be taxed as ordinary income, but the appreciation of the stock is not taxed until you sell it (then it’s taxed at the long-term capital-gains rate of 15 percent). If company stock is rolled over to an IRA, appreciation is taxed at the typically higher ordinary income tax rate of up to 35 percent when withdrawn from the account.
Think before you cash out
If you cash out too early after changing careers, you can receive a lot less in your savings than otherwise done. Try to avoid spending 401k funds when IRA funds are much more assessable. If you need to spend some of your retirement stash on necessities, at least try to avoid the 10 percent early withdrawal penalty. Both 401(k)s and IRAs can be used to pay for unreimbursed medical expenses that exceed 7.5 percent of your income without penalty.
