Depending upon your age, you can expect to change jobs 11 – 15 times in your career. That’s a lot of 401k’s and they’re often left behind, or “orphaned”. Simply ignoring the supercharged growth potential of early investing makes it a lot harder to get on track with retirement planning 10, 20 and 30 years down the road. Those orphans from your 20s and 30s may cost dearly when you find yourself facing extra years until retirement.
In Part 1 of this 2-part article, let’s go over how to move your account when you change jobs. Your decision depends upon the kind of account you have. In all situations, we are assuming you will keep your account instead of cashing out. Let’s go down the list:
401k/403b: 401k’s and 403b’s usually have a vesting schedule. Before you change jobs, it’s a good idea to check the calendar to see if a little extra time will net you a nice chunk of extra retirement money. If your plan has a “cliff vesting” schedule, you will have no right to any employer matching contributions if you leave even one day before you are vested at your 3-year anniversary.
When you leave your job, you should receive a packet with instructions for transferring your account. If your packet doesn’t contain a “Distribution Request” form, you will need to contact your plan administrator or employer to get this form. Once you submit your paperwork, the transfer will be done automatically. If the custodian cuts a check in your name, you’ll have 60 days to deposit the full amount or you will owe taxes and, possibly, a penalty to boot.
SIMPLE IRA: If you work for a relatively small employer, you may have a SIMPLE IRA rather than a 401k plan. SIMPLE and SEP IRAs have no vesting schedule, but a little known rule is that you will pay a 25% IRS penalty if you move your SIMPLE anywhere except to another SIMPLE account in the first 2 years. In other words, if your new employer offers a 401k rather than a SIMPLE, you can’t touch your SIMPLE until it is 2 years old.
Assuming you are past the 2-year deadline, however, you are free to roll your SIMPLE into another pre-tax account without penalty. Here’s what to do:
- If moving to an IRA (either Roth or Traditional): IRAs are held by a “custodian”, usually a bank or brokerage firm. You can open an IRA account with an online broker or by paying an investment advisor to manage your account as an intermediary between you and the custodian. You will complete a “Transfer Request” form along with the IRA application. In 7 to 14 business days, your new IRA will be open.
- If rolling into the 401k at your new employer: check with your H. R. department or with your plan administrator to find out if your 401k accepts IRA transfers. If so, fill out the paperwork provided by your new 401k administrator to transfer to your 401k.
- If moving to your new employer’s SIMPLE, same steps as moving into a 401k account.
Both of the above are called “trustee-to-trustee” transfers because the trustees work together to transfer the funds; you do not receive a check to deposit.
- If your SIMPLE funds check is made out to you, you will have 60 days to deposit it into your new account or it will be treated as a fully taxable distribution. The custodian also may withhold 20% for taxes. For example, if your account was worth $50k, your check after 20% tax withholding would be for $40k. You would have to come up with the extra $10k within 60 days or you are deemed to have taken a taxable distribution of $10k. You will also owe a 10% penalty if you are under age 59.5.
SEP IRA: A SEP is the easiest account to handle. All deposits are immediately vested and you can transfer at any point, even while you’re with your current employer. The procedures are the same as above.
Now that we’ve gotten the boring mechanics out of the way, read What to do with an old 401k, part 2 to learn when it’s better to roll over to an IRA, when you should stick with a 401k/403b and even when to cash out or leave your account with your former employer.
What if you have lost track of an old 401k? My video has 5 tips to help you find your missing money!