Money Essentials

How switching jobs affects your retirement fund

Don't let the IRS siphon your savings


When you change employers, you must decide what to do with your 401(k) money from your old job. You have three choices:

  • Cash out. This is the financial equivalent of shooting yourself in the foot, since you pay income taxes plus a 10% penalty if you're under 59-1/2, and you diminish your retirement savings.
  • Move your money into your new 401(k) or a rollover IRA.
  • Leave your money where it is. (You old employer has to allow this if you have more than $5,000 in the plan.)

If you decide to move it, make sure to do so as a trustee-to-trustee transfer. That means you never touch the money. You simply direct the company housing your new account to arrange the transfer with your old employer.

That method lets you avoid the costly traps involved in a "rollover," where your old employer writes a check to you, which you then must deposit in the new account within 60 days.

Sounds easy, but your former employer automatically will withhold 20% of your money for income taxes. You get it back the next time you file your income taxes, but you are required to rollover the full amount within 60 days, leaving you to come up with the missing 20% yourself in the short-term.

If you fail to roll over the full amount within the time limit, the IRS deems the shortfall a taxable withdrawal and imposes income taxes plus a 10% penalty.

Completing 401(k) distribution forms can sometimes be confusing, says Gordon Homes at MetLife. "Be careful to ensure the form is completed in a manner consistent with your intentions," he says. "Sometimes people will check off the rollover option thinking they're transferring it. It's really ugly when that happens, because it's next to impossible to reverse."

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