When you quit your job, you are more likely to be concerned about your 401(K) account. The money in that account is yours, and there are a couple of options for you to explore. Which option suits you best or which you will be able to use depends partly on the sum of money you have.
When you switch companies, you can roll it over into your new employer’s 401(K) account. Another option is rolling it over into your IRA, or you can simply let it be where it is if the amount is not so small.
Your account has less than £1,000
If you have less than £1,000 in your account when you quit your job, the IRS will automatically administer the process of closing your accounts. The money will be withdrawn and handed to you through a cheque. You will be liable to pay 20% in taxes deducted at source.
However, you can roll over to another account. Contact your 401(K) administrator. Once informed, they will handle everything. It is crucial to communicate with them because companies do not delay closing your account and writing you a cheque when the amount is low.
You have got money between £1,000 and £5,000 in your 401(K) account
If you have between £1,000 and £5,000 in your account, your employer can transfer it to your individual retirement account. In the event of the absence of an IRA, your employer can open it for you to transfer funds. However, if you have this account opened, you can ask your IRA administrator to initiate the transfer.
If you wish, you can withdraw money as well. However, you will be liable to pay a 20% tax and a 10% penalty for early withdrawal. It is usually suggested not to withdraw unless you are in dire need of money.
If your savings are short to get by and benefits cannot help keep your head above water, you can consider loans on benefits from direct lenders. These loans will cost you interest, but they are still more affordable as compared to the loss of money when withdrawing.
If your account holds more than £5,000
Since the amount is big, your employer is not in a position to make any decisions without your consent. You have three options to pick from:
- You can roll it over into a new account
If your new employer allows you to sign up for a workplace retirement account, you can easily roll over your previous account into a new retirement account. Rolling it over to a new account is unnecessary, even if your new employer has the facility. Instead, you can transfer these funds to your IRA. Bear in mind that rollover to another 401(K) is not an option if your new employer does not have this facility.
Transferring your funds to your IRA will be a better option as it will help you explore various investment opportunities. With more investment options, you can grow your wealth faster. Since you can handle your account on your own, you can tailor your investments to your goals.
You can save your money in 20% taxes if you opt for an indirect rollover, which is a method where a cheque is written to you, and you personally deposit the cheque in your new account, whether it is a new 401(K) or IRA.
Since direct rollovers that do not require your involvement are initiated, contact the administrators of both accounts. You will have a deadline of 60 days to complete the deposit. If you meet it, you can get a refund for the 20% amount. Do not choose a Roth IRA because this is subject to income tax on transfer.
- Let your money be in your old account
Your money is absolutely safe in your retirement account when you quit your job. However, no contribution can be made to that account further later on. Though it seems the simplest option, you should always give it a second thought. It might be harder for you to track your investment accounts in more than one place.
Further, you may be levied some fees if you are no longer an active employee of that company. There are no benefits to letting your funds be with your former employer, so it makes more sense to explore other options.
You can cash out whenever you want. It is absolutely up to you, but remember that withdrawing funds before turning 59.5 has some downsides. You will be imposed up to 105 penalties for early withdrawal. In addition, you will also lose some of your savings in taxes.
There are some people who tend to withdraw funds in case of urgent need of money. This should be treated as a last resort because it is not a wise decision. If you need money urgently and find it hard to qualify for a loan, you should consider taking out the best joint loans in the UK. With a good credit history or your spouse or a family member, you will be able to get the nod for a loan.
Suppose high-interest payments are a concern because your payment history is not so stellar. In that case, you should still explore all possible options available to you, apart from cashing out your retirement savings. Compared to early withdrawal charges and tax penalties, you will still find them affordable.
Financial experts suggest not withdrawing your retirement funds because you will find it even harder to replenish your savings loss. If your retirement savings are not sufficient, you will find it a labyrinth to get by in the golden years of your life.
The final word
You have multiple options to pick from to tackle your 401(K) account when you quit your job. It is paramount to make a wide decision. Though cashing out is an option, you should always avoid it. Not only will you lose some money in early withdrawal penalty and income tax, but you will also have enough of it to get by when you retire.