Changed Jobs, Received a Retirement Plan Distribution? Don’t Panic.

When you start a new job, it is easy to dive into the new opportunity and make the most of it.  A new job comes with a renewed sense of energy and a steep learning curve – new company, new co-workers, new boss, new responsibilities, and new benefits.  But don’t forget about something you received from your old employer – something important that could impact your current and future financial life: your 401(k) or retirement plan.

You may say, “I wasn’t there that long. It’s not a lot of money.”  But it could be even a smaller amount if you don’t take the necessary actions – especially if you received a distribution check from the plan.

If the balance in your 401(k) plan is under $5,000, your former plan’s administrator may be within their rights to “cash in” the account and send the money straight to you. In doing so, they’d be required to withhold 20% for taxes. Taxpayers under the age of 59 ½ will also have to pay an additional 10% penalty come tax time. Hurts, right?

You can get this money back by depositing the funds into another retirement plan or individual retirement arrangement (IRA) – but you must do so within 60 calendar days. Further, you’ll have to make up the 20% withholding with out-of-pocket money – reclaiming the initial withholding at tax time. It is a lot easier to cash the check and pocket the money. In so doing, you’re paying a penalty and potentially giving up on decades of tax sheltered growth.

The IRS has identified this problem and come up with a solution. In August 2016, a new procedure was passed in which eligible taxpayers can qualify to waive the 60-day time limit.  So if the distribution check was misplaced and never cashed, the taxpayer’s home was damaged, a family member of the taxpayer died or was severely ill, or other hampering circumstances occurred then the taxpayer can remit a Certification for Late Rollover Contribution letter to the plan administrator and avoid the post 60-day penalties and/or tax levy. This is particularly great news for those who have or do change jobs frequently, as they are likely to hold smaller balances in their accounts.

While the new procedure is a win for small investors, it is always wise to consider whether to leave your funds in a 401(k) or transfer via a rollover to another plan or IRA. It is a good opportunity to examine expenses, transparency, and investment options.

Talk to your fee-only financial planner to determine what is best for you. Or, contact us to discuss.


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