401k Rollover

401k Rollover
by Takara Alexis

Maybe you're about to change jobs, change companies, or change your career completely. Whatever change is a foot, we don't have to remind you how necessary it is to keep an eye on your retirement funds during hectic times. Assets for your retirement should be able to respond to any possible changes with ease.

If you're switching jobs and have an existing retirement plan, such as a 401(k), you should already have a Summary Plan Description in your possession. This will describe your retirement plan and the options available to you, regarding your old (or, soon to be old) companies plan. You want to share this document with a financial expert so both of you can chose what option fits you best.

Typically, you'll have three important options for your retirement fund when changing jobs. You can take your investment savings and keep the cash as a lump sum (sit), you are able to leave the money where it is (stay), or you could "roll over" your retirement money into a different retirement plan or an IRA. Every option has its pros and cons. Depending on your situation in life and in your career, you'll want to discuss with a financial expert and pick the best option for you.

If you choose to withdraw your money in a lump sum from a previous employer's retirement fund, you must pay taxes on the money you take out. In addition to those taxes, your employer is expected to take a 20% withholding from your lump sum, and if you are under 59 years old, you may also be forced to pay a 10% penalty tax.

You can roll over the lump sum and avoid the fine provided that you deposit the funds in an IRA or another employer plan within 60 days. You will need to make up the additional 20% withheld by your employer. The 20% withholding will be subtracted from your reported income when your taxes are due.

There are, however, exceptions to the laws of roll-overs for first time homebuyers. If you are clearing out your previous retirement fund and wish to use up to $10,000 towards the purchase of a first home, you're permitted to do so. You are taxed on the withdrawal, but you don't have to pay the extra 10% early withdrawal fee. In addition you have up to 120 days to use the $10,000 on a first-time home purchase rather than the basic 60 days.

These are just the basic options you may have while switching careers and retirement plans. Deciding what to do with your retirement savings when changing companies or careers is one of the most important choices you will make. And if you are prepared in advance, you'll know when it comes time to confront change, you'll be ready.