When you change employers, don’t forget to take your 401(k) with you.
Rolling your employer retirement savings plan into an Individual Retirement Account can leave you money ahead. Not only will transferring those funds into an IRA help you continue saving for the future, but your money will keep growing tax-deferred.
When employer plans are cashed out, there is a mandatory withholding of 20 percent federal tax, says Lynn Schmitt, Dupaco Community Credit Union’s IRA Coordinator. You also might be charged a 10-percent early withdrawal penalty from the Internal Revenue Service if you don’t qualify for an exception.
“So essentially 30 percent of your balance is lost,” Schmitt says. “When an employer plan is rolled over directly into an IRA, it is a non-taxable event with no penalties by the IRS. Plus, you still have those funds set aside for retirement!”
Rolling your 401(k) into a Dupaco IRA takes little effort on the member’s end. If your company gave you paperwork to make your distribution election, Dupaco can help you fill that out and return it to the company. If you didn’t receive paperwork, simply bring a 401(k) statement to a Dupaco branch so that your credit union can call the company with you.
“A lot of times we can request the rollover over the phone with your authorization,” Schmitt says. “If not, we will request the necessary paperwork to complete the rollover. Either way, a Dupaco representative is happy to help you through the process.”
It might be tempting to cash out those funds, but tread cautiously, Schmitt says. If you have an immediate need for funding, Dupaco can help you explore other options first. It’s also important to consult your tax advisor to understand how an early withdrawal would affect you in both the short- and long-term, Schmitt says.
If an employer plan is cashed out, eligible participants have 60 days from receiving the funds to put them back into an IRA as a rollover. Whatever amount does not get returned, such as the 20-percent federal tax that was withheld, becomes taxable income subject to the IRS penalty, Schmitt says.
“Don’t forget that these funds are meant for retirement, and you’re just setting yourself back by cashing it in, even if it seems like a small amount,” Schmitt says.
For questions about rolling your 401(k) into a Dupaco IRA, stop by any Dupaco branch or call (563) 557-7600 / 800-373-7600, ext. 218.