DCU Financial - Changing Jobs?

The economy has slowed down and companies have restructured. A number of people have found themselves out of work or switching jobs for the first time. Regardless of the reasons - layoffs, early retirement, or employee choice - employee turnover is rising. For many, job transition brings with it many changes including new health insurance, direct deposits, co-workers, and employers, and, for most, the inevitable question: What do I do with my 401(k)?

A change of any kind is the perfect time for re-evaluation of your long-term goals, bother personal and financial. Most of us invest money in our 401(k) and seldom re-evaluate our financial position as long as the account is growing. Evaluating your situation during this transition can help you focus on your long-term savings plan.

So, what are your options? There are four viable choices: stay invested in your current plan, invest your assets in the new employer's plan, take a cash distribution, or roll your assets into another qualified plan or IRA.

Staying in your current plan may or may not be an option, depending on the plan. During your financial re-evaluation ask yourself if you are really happy with your current plan. On the positive side of leaving your investments in your old 401(k), your funds will continue to grow tax-deferred as long as you keep them in the plan. On the negative side, you may not have the same privileges as you did when you were an employee, making access more difficult in the event of an emergency.

Investing in your new employer's plan is another option that would allow retirement assets to remain tax-deferred. However, depending on the employer's policy, you may have to wait six months or more before becoming eligible to enroll. Also, if after-tax money was contributed to the previous employer's plan, those assets are not eligible for transfer.

Sometimes, during a job transition, money is tight. You may also be so enthusiastic that you're tempted to cash out your 401(k) and buy a new car for that new commute. Before you run out to the car dealer, you should look at the tax implications of doing so. Your previous employer is required to withhold 20% of your distribution and an additional 10% if you are under the age 55. For many taxpayers, there may be added taxes due if the 20% withholding is not enough to meet your marginal income tax bracket. For some, this bracket can be as high as 35% and does not include your state's income taxes. This difference would be due when you file your taxes for the year the distribution is made. These taxes can really take a bite out of your retirement nest egg.

By far, the option with the least exposure to taxes and penalties and the most investment flexibility is to roll your 401(k) over to another tax-deferred investment. This lump sum distribution is rolled over into an IRA or other qualified plan. Provided that the 401(k) does not contain a mixture of salary deductions (pretax) and post-tax contributions, the entire balance can be rolled into the IRA tax-free.

Your work hard to plan and save for your retirement. Deciding what to do with your 401(k) when you change jobs is the one of the most important financial decisions you can make at this time. Effective evaluation, planning, and implementation can make this transition easier.

Our Financial Consultants are experienced at helping you evaluate your options as you reconsider your 401(k). They can provide you with the information that you need to make the best decisions for you. To speak with a DCU Financial Consultant, contact 800.328.8797, ext. 6077, or email financial@dcu.org.