Changing Jobs? Your 401(k) Retirement Account Options

Learn what options are available for your 401(k) retirement account when you change jobs.

I'm changing jobs: What do I do with my 401(k)?
One of three options is available to you when you change employment. You can:

1. Leave the money in your former employer's 401(k) plan.
2. Take a distribution (cash out).
3. Request a rollover into your new employer's 401(k) plan or rollover your money into an IRA.

Whatever you decide to do, there are some important guidelines you should follow to avoid paying large tax penalties. Review the following options to see which is suitable for you.

Option 1: Leave your 401(k) where it is
Many companies will allow you to leave your 401(k) account in their 401(k) plan if you meet a certain minimum dollar requirement. If you choose to leave your retirement account where it is, you may want to consult your tax advisor as well as your former employer's benefits department to learn if any restrictions exist or if completion of paperwork is required.

There are a few important factors to consider:

• Once you leave a company, you'll no longer be able to contribute to your former employer's 401(k) plan, although you can continue managing the money that's already in your account
  
  
• 401(k) plans may offer limited investment options; or the company's plan or plan options may change offering fewer choices
  
  
• Minimum requirements may prevent you from leaving money in your former employer's plan

Option 2: Take a distribution
Cashing out on your 401(k) account (in other words, taking cash) can seem appealing; however, this option may carry some big drawbacks, as outlined below:

• Loss of money available for retirement
  
  
• Loss of tax-deferred growth potential
  
  
• Your former employer will be required to withhold 20 percent of your distribution for federal taxes
  
  
• Money from your 401(k) account is considered income, so you may be subject to additional federal, state and local income taxes in the year the distribution is received. Consult your tax advisor when dealing with issues related to taxes. WaMu Investments doesn't offer legal, tax or estate planning advice
  
  
• A 10% federal tax penalty will occur if you're under age 59 1/2 (or 55, if separated from service)

If you've taken a distribution, you can avoid these tax consequences by rolling over your 401(k) proceeds plus an amount equal to the 20 percent withheld, into another retirement investment vehicle within 60 days of taking the distribution.

However, a more seamless method would be to initiate a direct or trustee-to-trustee transfer of your 401(k) funds. This method will eliminate the need to remember the 60-day window when taking a distribution as well as any potential mistakes that could occur. Read further to learn about direct or trustee-to-trustee transfers.

Option 3: Request a rollover into a new 401(k) or an IRA
What is a rollover? A rollover is a tax-free transfer of money from one qualified investment to another. A rollover is easy to set up and can protect you from expensive mistakes or oversights.

With a direct or trustee-to-trustee transfer, the money from your old 401(k) account is transferred into your new employer's 401(k) plan or into a rollover IRA, for continued tax-deferred growth potential.

If your new employer doesn't offer a 401(k) plan, you can have your money transferred into a rollover IRA. In fact, some investors prefer IRAs over 401(k) accounts, simply because IRAs tend to offer more investment options (learn more about a rollover IRA).

If you already have an IRA, you can establish a new IRA account for your rollover funds. (Note: The amount you roll over from a 401(k) account isn't limited to the IRA's annual contribution limit.)

Review the following benefits of doing a direct or trustee-to-trustee transfer:

1. At the time of transfer, the funds in your account won't be subject to a 20 percent withholding for taxes.
   
   
2. Your money will continue to grow tax deferred, since it's transferred directly from one retirement account to another.
   
   
3. Eliminate the need to remember important cut-off dates (such as the 60-day rollover window when taking a distribution).

Whether you transfer your money into a new 401(k) plan or into a rollover IRA, setting up a a direct rollover is relatively simple. To initiate a rollover, you'll need to obtain necessary paperwork by contacting:

• Your former employer's human resources or benefit department (or the investment company that manages your former employer's 401(k) plan); and
  
  
• Your new employer's human resources or benefits department should you choose to roll over your money into the new 401(k) plan; or
  
  
• A financial services company, like WaMu Investments, that offers IRAs should you choose to establish a rollover IRA

Consider a trustee-to-trustee transfer of your former 401(k) account for continued tax-deferred growth potential, investment options, and to continue saving for retirement.

Is it a good time to do more?
If you're making a move in your career—and possibly moving your old 401(k) funds—you may find that this is a good time for you to start thinking about your financial goals and looking into or changing any existing investments you may have.

Find an investment professional at a WaMu financial center near you for a free consultation.

Any discussion of tax issues is not intended or written to be used and can't be used to avoid taxes and penalties imposed by the Internal Revenue Service.