|
If you leave an employer before you reach retirement age, whether or not you
can take your benefits out and/or roll them into another tax-qualified plan
or account will depend on what type of plan you are in.
If you leave before retirement, can you take your retirement benefit with
you?
If you are in a defined benefit plan (other than a cash balance plan), you
most likely will be required to leave the benefits with the retirement plan
until you become eligible to receive them. As a result, it is very important
that you update your personal information with the plan administrator
regularly and keep current on any changes in your former employer’s
ownership or address.
If you are in a cash balance plan, you probably will have the option of
transferring at least a portion of your account balance to an
individual retirement account or to a new employer’s
plan.
If you leave your employer before retirement age and you are in a defined
contribution plan (such as a 401k plan), in most cases you will be able to
transfer your account balance out of your employer’s plan.
What choices do you have for taking your defined contribution benefits?
-
A lump sum – you can choose to receive your benefits as a single payment
from your plan, effectively cashing out your account. You may need to
pay income taxes on the amount you receive, and possibly a penalty.
-
A rollover to another retirement plan – you can ask your employer to
transfer your account balance directly to your new employer’s plan if it
accepts such transfers.
-
A rollover to an IRA – you can ask your employer to transfer your
account balance directly to an individual retirement account (IRA).
-
If your account balance is less than $5,000 when you leave the employer,
the plan can make an immediate distribution without your consent. If
this distribution is more than $1,000, the plan must automatically roll
the funds into an IRA it selects, unless you elect to receive a lump sum
payment or to roll it over into an IRA you choose. The plan must first
send you a notice allowing you to make other arrangements, and it must
follow rules regarding what type of IRA can be used (i.e. it cannot
combine the distribution with savings you have deposited directly in an
IRA). Rollovers must be made to an entity that is qualified to offer
individual retirement plans. Also, the rollover IRA must have
investments designed to preserve principal. The IRA provider may not
charge more in fees and expenses for such plans than it would to its
other individual retirement plan customers.
Please Note: If you elect a lump sum payment and do not transfer the
money to another retirement account (employer plan or IRA
other than a Roth IRA), you will owe a tax
penalty if you are under age 59½ and do not meet certain exceptions. In
addition, you may have less to live on during your retirement. Transferring
your retirement plan account balance to another plan or an IRA when you
leave your job will protect the tax advantages of your account and preserve
the benefits for retirement.
What happens if you leave a job and later return?
If you leave an employer for whom you have worked for several years and
later return, you may be able to count those earlier years toward vesting.
Generally, a plan must preserve the service credit you have accumulated if
you leave your employer and then return within five years. Service credit
refers to the years of service that count towards vesting. Because these
rules are very specific, you should read your plan document carefully if you
are contemplating a short-term break from your employer, and then discuss it
with your plan administrator. If you left employment prior to January 1,
1985, different rules apply.
If you retire and later go back to work for a former employer, you must be
allowed to continue to accrue additional benefits, subject to a plan limit
on the total years of service credited under the plan.
Action Items
-
If you are leaving an employer before retirement, find out whether you
can roll your benefits into a new plan or into an IRA.
-
If you are leaving your benefits in your former employer’s plan, be sure
to keep your contact information up to date with the former employer,
and keep track of the employer’s contact information.
-
If you are considering taking your benefits out as a lump sum, find out
what taxes and penalties you will owe, and make a plan on how you will
replace that income in retirement.
For more information or to have us answer any questions you may have,
please call 1-800-559-2900,
,
see our
contact Atlantic Financial
page,
or use this form to contact us:
Source
U.S. Department of Labor
(www.dol.gov)
|
