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Rolling Over Retirement Assets: Taking Your Money After a Job Change

Rolling Over Retirement Assets: Taking Your Money After a Job Change

March 13, 2023

Roughly 50.5 million people quit their jobs in 2022, according to the federal JOLTS report. Changing jobs can be a tumultuous experience. Even under the best of circumstances, making a career move requires a series of tough decisions, not the least of which is what to do with the funds in your old employer-sponsored retirement plan or employer-issued stocks.

If you’ve made a job change and aren’t sure what to do with your 401(k) or company stock, here are a few options along with some pros and cons.

401(k) Plan Options

Leave it where it is

If your former employer allows it, you can leave your 401(k) where it is. This is one of the “easiest” options as it generally requires you to do nothing. However, some plan providers may charge additional fees because you're no longer an employee. If you’re like most working Americans, you will likely change employers multiple times over the life of your career, managing several retirement plans can prove to be complicated. Additionally, the IRS mandates required minimum distributions (RMDs) annually from all such accounts beginning at age 72 (assuming you're no longer working for the employer sponsoring the account). Fail to calculate the correct amount across multiple accounts, and the IRS will slap you with a 50% penalty on the shortfall.

Roll it into your new employer plan

This of course is dependent that your new employer has a sponsored retirement plan in place and will be subject to the new plan’s fees, features and investment choices. This will also require you to liquidate your current 401(k) investments and the money will be subject to your new plan's withdrawal rules, which you may not be able to withdraw until you leave your new employer.

Roll over into a traditional IRA

An Individual Retirement Account (IRA) is just that, a retirement account that you own directly. Because IRA’s aren’t sponsored by an employer you won't have to worry about making changes to your account should you change jobs again in the future. Once funds have been rolled into an IRA, they might not be eligible for a future rollover into a 401(k) plan, and RMDs apply at age 72, regardless of whether you're employed. Also, you'll need to specify how the funds in your traditional IRA are to be invested. Until you do so, the money will remain in cash or a cash equivalent, such as a money market account, rather than invested. This is a great opportunity to consult with a financial advisor on which investments might be a good fit for your unique situation and risk tolerance.

Convert into a Roth IRA

Provided you are over age 59½ and you have held the account for five years or more, withdrawals from this account are entirely tax-free in retirement. Roth IRAs are also exempt from RMDs. However, Because Roth IRAs are funded with after-tax dollars, you'll have to pay taxes on your existing 401(k) funds at the time of the conversion. A Roth IRA must be open for five years in order to withdraw earnings tax-free, and you'll be subject to a 10% penalty if you withdraw any money before you're 59½ without an exemption.

Cash it out

You also have the option to withdraw the funds from your 401(k).  But beware, you’ll pay taxes at ordinary income tax rates and if you’re under 59 ½ you’ll pay an early withdrawal penalty, not to mention you’ll be missing out on future growth potential.  However, if you deposit the funds back into a qualified retirement plan within 60 days, you can avoid the taxes and penalties.

If you are laid off, fired or quit a job between the ages of 55 and 59 ½ , there is a special IRS rule that allows you to avoid the early 10% withdrawal penalty called the Rule of 55.  The penalty waiver only applies to funds withdrawn from your current 401(k), the plan you were contributing to while you were at the job you leave at age 55 or older.  Withdrawn funds are still taxable as the waiver only applies to the early withdrawal penalty. 


Company Stock

Many companies offer equity compensation as part of your overall pay, bonus, and employee benefits package. The most common types of awards are, restricted stock, performance awards and stock options.

When you leave your employer, whether it's due to a new job, a layoff, or retirement, it's important not to leave your stock grants behind. Understanding when your awards vest may help you “time” a resignation. In most cases, vesting stops when you terminate. For stock options, under most plan rules, you will have no more than 3 months to exercise any vested stock options when you terminate.


What is Net Unrealized Appreciation (NUA)?

If you hold appreciated company stock within your 401(k), you may qualify to take advantage of a little-used IRS rule that can help reduce taxes. 

NUA is the difference between how much you paid or contributed to your company stock and its current market value. For example, if you were issued employer stock at $20 per share and it is now worth $50 per share, you would have an NUA of $30 per share ($50 - $20 = $30).

Your NUA may be taxed differently than other payments. When you transfer most types of assets from a 401(k) plan to a taxable account, you pay income tax on their market value. But with company stock, you pay income tax only on the stock’s cost basis—not on the amount it gained since you bought it.

With this in mind, a participant may be able to transfer company stock from their previous plan into a taxable investment account without treating the entire amount as ordinary income.

An IRA rollover may make sense whether you’re leaving one job for another or retiring altogether. Company stock and its many nuances vary across employers and can be complex to navigate. Consulting with financial professionals such as an accountant or a tax-smart financial advisor can prove to be helpful and potentially save you time and money when deciding what to do with your retirement money you diligently set aside at your last job.