Changing Jobs? Take Your 401(k) and Roll It

ALEXANDER BUBLITZ

August 10, 2016

If you've lost your job, or are changing jobs, you maybe wondering what to do with your 401(k) planaccount. It's important to understand your options.

What will I be entitled to?If you leave your job (voluntarily or involuntarily), you'llbe entitled to a distribution of your vested balance.Your vested balance always includes your owncontributions (pretax, after-tax, and Roth) andtypically any investment earnings on those amounts.It also includes employer contributions (and earnings)that have satisfied your plan's vesting schedule.

In general, you must be 100% vested in youremployer's contributions after 3 years of service ("cliffvesting"), or you must vest gradually, 20% per yearuntil you're fully vested after 6 years ("gradedvesting"). Plans can have faster vesting schedules,and some even have 100% immediate vesting. You'llalso be 100% vested once you've reached your plan'snormal retirement age.

It's important for you to understand how yourparticular plan's vesting schedule works, becauseyou'll forfeit any employer contributions that haven'tvested by the time you leave your job. Your summaryplan description (SPD) will spell out how the vestingschedule for your particular plan works. If you don'thave one, ask your plan administrator for it. If you'reon the cusp of vesting, it may make sense to wait abit before leaving, if you have that luxury.

Don't spend it, roll it!While this pool of dollars may look attractive, don'tspend it unless you absolutely need to. If you take adistribution you'll be taxed, at ordinary income taxrates, on the entire value of your account except forany after-tax or Roth 401(k) contributions you'vemade. And, if you're not yet age 55, an additional10% penalty may apply to the taxable portion of yourpayout. (Special rules may apply if you receive alump-sum distribution and you were born before1936, or if the lump-sum includes employer stock.)

If your vested balance is more than $5,000, you can

leave your money in your employer's plan until youreach normal retirement age. But your employer mustalso allow you to make a direct rollover to an IRA orto another employer's 401(k) plan. As the namesuggests, in a direct rollover the money passesdirectly from your 401(k) plan account to the IRA orother plan. This is preferable to a "60-day rollover,"where you get the check and then roll the money overyourself, because your employer has to withhold 20%of the taxable portion of a 60-day rollover. You canstill roll over the entire amount of your distribution, butyou'll need to come up with the 20% that's beenwithheld until you recapture that amount when you fileyour income tax return.

Should I roll over to my newemployer's 401(k) plan or to an IRA?Assuming both options are available to you, there'sno right or wrong answer to this question. There arestrong arguments to be made on both sides. Youneed to weigh all of the factors, and make a decisionbased on your own needs and priorities. It's best tohave a professional assist you with this, since thedecision you make may have significantconsequences--both now and in the future.

Reasons to roll over to an IRA:

• You generally have more investment choices withan IRA than with an employer's 401(k) plan. Youtypically may freely move your money around tothe various investments offered by your IRAtrustee, and you may divide up your balanceamong as many of those investments as you want.By contrast, employer-sponsored plans typicallygive you a limited menu of investments (usuallymutual funds) from which to choose.

• You can freely allocate your IRA dollars amongdifferent IRA trustees/custodians. There's no limiton how many direct, trustee-to-trustee IRAtransfers you can do in a year. This gives youflexibility to change trustees often if you aredissatisfied with investment performance orcustomer service. It can also allow you to have

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is notspecific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposeof avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or herindividual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believedto be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any timeand without notice.

IRA accounts with more than one institution foradded diversification. With an employer's plan,you can't move the funds to a different trusteeunless you leave your job and roll over thefunds.

• An IRA may give you more flexibility withdistributions. Your distribution options in a401(k) plan depend on the terms of thatparticular plan, and your options may be limited.However, with an IRA, the timing and amount ofdistributions is generally at your discretion (untilyou reach age 70½ and must start takingrequired minimum distributions in the case of atraditional IRA).

• You can roll over (essentially "convert") your401(k) plan distribution to a Roth IRA. You'llgenerally have to pay taxes on the amount youroll over (minus any after-tax contributionsyou've made), but any qualified distributionsfrom the Roth IRA in the future will be tax free.

Reasons to roll over to your new employer's401(k) plan:

• Many employer-sponsored plans have loanprovisions. If you roll over your retirement fundsto a new employer's plan that permits loans,you may be able to borrow up to 50% of theamount you roll over if you need the money.You can't borrow from an IRA--you can onlyaccess the money in an IRA by taking adistribution, which may be subject to income taxand penalties. (You can, however, give yourselfa short-term loan from an IRA by taking adistribution, and then rolling the dollars back toan IRA within 60 days.)

• A rollover to your new employer's 401(k) planmay provide greater creditor protection than arollover to an IRA. Most 401(k) plans receiveunlimited protection from your creditors underfederal law. Your creditors (with certainexceptions) cannot attach your plan funds tosatisfy any of your debts and obligations,regardless of whether you've declaredbankruptcy. In contrast, any amounts you rollover to a traditional or Roth IRA are generallyprotected under federal law only if you declarebankruptcy. Any creditor protection your IRAmay receive in cases outside of bankruptcy willgenerally depend on the laws of your particular

state. If you are concerned about asset protection,be sure to seek the assistance of a qualifiedprofessional.

• You may be able to postpone required minimumdistributions. For traditional IRAs, thesedistributions must begin by April 1 following theyear you reach age 70½. However, if you workpast that age and are still participating in youremployer's 401(k) plan, you can delay your firstdistribution from that plan until April 1 following theyear of your retirement. (You also must own nomore than 5% of the company.)

• If your distribution includes Roth 401(k)contributions and earnings, you can roll thoseamounts over to either a Roth IRA or your newemployer's Roth 401(k) plan (if it acceptsrollovers). If you roll the funds over to a Roth IRA,the Roth IRA holding period will determine whenyou can begin receiving tax-free qualifieddistributions from the IRA. So if you're establishinga Roth IRA for the first time, your Roth 401(k)dollars will be subject to a brand new 5-yearholding period. On the other hand, if you roll thedollars over to your new employer's Roth 401 (k)plan, your existing 5-year holding period will carryover to the new plan. This may enable you toreceive tax-free qualified distributions sooner.

When evaluating whether to initiate a rollover alwaysbe sure to (1) ask about possible surrender chargesthat may be imposed by your employer plan, or newsurrender charges that your IRA may impose, (2)compare investment fees and expenses charged byyour IRA (and investment funds) with those chargedby your employer plan (if any), and (3) understandany accumulated rights or guarantees that you maybe giving up by transferring funds out of youremployer plan.

What about outstanding plan loans?In general, if you have an outstanding plan loan, you'llneed to pay it back, or the outstanding balance will betaxed as if it had been distributed to you in cash. Ifyou can't pay the loan back before you leave, you'llstill have 60 days to roll over the amount that's beentreated as a distribution to your IRA. Of course, you'llneed to come up with the dollars from other sources.

In some cases, you haveno choice--you need touse the funds. If so, tryto minimize the taximpact. For example, ifyou have nontaxableafter-tax contributions inyour account, keep inmind that you can rollover just the taxableportion of yourdistribution and keep thenontaxable portion foryourself.

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