If you have changed jobs or retired from a company that provided you with a 401k or a similar retirement plan, you must decide what you want to do with your funds in that company sponsored plan.  I get asked, “Should I cash in my 401k?”  The answer to this question can depend on your situation, but generally, cashing in your 401k is not the best option for you.  Let’s discuss some scenarios and options to consider.

First, if you are 55 or older and you leave employment voluntarily or involuntarily, you can typically have access to your company sponsored retirement plan without incurring the 10% penalty for early withdrawal.  If you are under 55, the 10% penalty would apply to any amount you take out that does not meet an exception allowed by the plan.  The vast majority of people who change jobs are going to be under 55 years old.  In your, instance if you were to cash in your 401k or company sponsored retirement plan, you will have to pay taxes on what you take out of the plan, plus you will owe an additional 10% in penalties for early withdrawal.  Most retirement plans hold out a mandatory 20% in taxes.  If you have $100,000 in a retirement plan and you cash it in, you are only going to be netting $70,000.  If you’re at 55 or retirement age where you can access your funds without a 10% penalty, then you need to consider the taxes.  If you have a sizeable retirement plan balance, when you take a full distribution, the balance in your plan will be considered taxable income.  That means it will be like your wages and taxed at the federal and state income tax brackets accordingly.  If you were making $100,000 a year and you have a $500,000 balance in your retirement plan that you take a full distribution on, then your tax bracket is going to jump to the higher brackets on a good portion of the money you receive. If you don’t need that money immediately, you are costing yourself a lot in taxes that are unnecessary.  For these reasons, cashing your retirement plan in is usually not the best option for you.

Let’s look at some better options for your money.  If you’re at retirement age,  don’t need access to your retirement funds for a while, and you’re happy with the investment options within the plan, you can typically leave the money in the plan and keep it invested the way you had it.  Most plans do not require you to move your money out of the plan when you leave or retire unless your balance is under a certain dollar amount.  Maybe you think you may need your money within the next 5 years, then you may want to reallocate your funds to a more conservative allocation within the plan.   If you do need some funds, you just must contact your plan sponsor to fill out some paperwork or go to the online account to request a withdrawal.  Remember you can always request partial withdrawals once you reach retirement age.  The plan typically has options to allow you access to your funds on demand when you need them.

If you are not at retirement age, you don’t have access to the funds in your plan without a penalty.  You can leave the funds in the company plan if you are happy with the investment options.  You can also rollover the balance to your new company sponsored retirement plan or to an Individual retirement account (IRA) where you have more investment options than a retirement plan typically offers.  I typically recommend people consolidate their retirement plans either rolling to their existing company plan or to an IRA.  It’s important to keep up with your retirement funds and make sure you are allocated properly to help you meet your retirement goals.  It’s much easier when all your funds are in 1 or 2 places.  Sometimes people like to rollover to an IRA to keep the funds separate from their employer sponsored plan.  There are also different exceptions to access your funds through an IRA to avoid the penalties that are not allowed through a retirement plan.  The benefits of rolling to an IRA also allow you access to a wider variety of investment options and vehicles that are not offered through a company sponsored plan.  When you rollover your funds, you are not taxed on the transfer either.  The funds remain tax deferred if you do a direct rollover or deposit the funds within a retirement vehicle with in 60 days if you do an indirect rollover which is where a check is made directly to the account holder and not the plan or IRA.

If you are at retirement age, and you are not crazy about the investment options in the plan, then you can look at rolling the funds out of the plan and to the IRA, as well.  If you do this, you must make sure you are 59 ½ if you anticipate needing the funds in a short time.  If you are between 55 and 59 ½ and you roll your money over to an IRA, you lose your access without penalty.  The 55 to 59 ½ rule only applies if its in a 401k plan.  Once you move to an IRA, the 59 ½ rule applies to those funds which means the 10% penalty would apply if you were not at least 59 ½.

When you leave a company or are retiring with an employer retirement plan, your 3 main options are to keep it in the plan, reallocate it in the plan, or roll it over to a new plan or IRA.  These options are better than paying a higher tax than necessary or paying a penalty if you don’t have to.  Please remember to consult with your tax professional and financial professional when considering transactions with your retirement funds.

Please be advised that the concepts discussed in this article are the author’s opinion and are not to be taken as tax or investment advice.

 Please be sure to speak to your advisor to carefully consider the differences between your company retirement account and investment in an IRA. These factors include but are not limited to changes to availability of funds, withdrawals, fund expenses, fees, and IRA required minimum distributions.

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