[Photo: This is my lunch spot. It’s just outside my office, also known as our dinning room. It’s where I eat my lunch mid-day and read. It is a great break from being at my desk most of the day. I have found it especially important to take this break now that I am working from home. ‘Hope you have an equally good spot to take a break!]
The 401(k) is the number one savings vehicle for most working people. And, until retirement, it is typically the largest asset account for most working people. With that much at stake, it is important to know when you can roll money into or out of this account.
In contrast to an IRA, which is pretty portable, a 401(k) is tied to your employer. Most plans are similar in terms of maximum contributions limits (currently $19,500 or $26,000 if age 50 or older). But each plan can have slightly different rules for matching contributions, loans, and vesting.
Rolling money into your 401(k)
Most people know they can add to their 401(k) by making salary deferrals which puts money directly into their plan account. However, you can also contribute assets from old 401(k)s at former employers or even IRAs. Most plans allow you to roll money from another qualified retirement plan into your existing employer plan. This can simplify keeping track of multiple old 401(k)s at former employers and avoids losing track of those assets.
With the average employee changing jobs a dozen times or more over a lifetime, old 401(k)s can start piling up quickly. Plus, if you moved after your old job or changed email addresses, you may stop getting correspondence from the old plan. This can cause you to lose track of your retirement money.
Key tip: One feature of rolling in your old 401(k) is that it’s your money and it is not subject to your employer’s vesting schedule. In other words, you can roll out former employer money and take it with you any time—even while you’re still an employee.
Rolling money out of your 401(k) plan
Usually this can only be done once your employment is terminated. Note: Money that your employer, and often you, contribute to your current employer plan is typically not eligible to be rolled out of the plan while you are still an active employee. So, while you are working for your employer, your salary deferrals and company matching contributions are usually “held hostage” until you leave. That’s not such a bad thing as long as you have a diverse list of good, low cost investment options.
401(k) Withdrawal Options
Generally, your salary deferrals cannot be made until:
- You die, become disabled, or terminate employment
- The plan terminates
- You reach age 59 ½
In most cases, if you take a distribution and do not meet any of the above criteria, your distribution will be subject to ordinary income taxes and subject to a 10% penalty tax. That’s like burning part of your hard-earned money.
Other ways of withdrawing money from a 401(k) include: hardship withdrawals, loans and other special circumstances. We’ll cover these in another blog article.
Of course, the best practice is to just keep saving until you retire. For most workers, they are going to need every penny they put away (most workers fall far short of saving what they will need in retirement).
Still have questions about rolling money in an out of your 401(k)? Give us a call. We’re here to help.
Lyman H. Jackson
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.