Transferring your 401(k) may have just gotten easier
There’s one major workplace benefit that anyone leaving a job can and should take with them, it’s their 401(k).
The Department of Labor is proposing a new regulation that would make easier for workers to move retirement accounts when they change jobs.
Under the new proposal, employees could have their employer automatically roll over their 401(k) money to an IRA with no rollover fees when they leave a job, and the IRA money would automatically be transferred to a 401(k) at their next job. If the new employer doesn’t offer a 401(k) plan or if the employee doesn’t find a new job, the money would then stay in an IRA.
At the end of 2018, the Labor Department proposed an exemption to the Employee Retirement Income Security Act of 1974, which was designed to reduce the leakage from 401(k) accounts, which means people pulling money out of the accounts before they retire.
Most of this leakage happens when employees change jobs and have to figure out what to do with the 401(k) account from their prior job.
“I want people to stay in control of their money so that they can lead themselves to their retirement dreams,” Ramsey Solutions financial expert Chris Hogan told FOX Business' Maria Bartiromo on Tuesday.
The money you contribute to a 401(k) is yours to keep, but the IRS imposes strict distribution rules because of the preferential tax treatment.
Withdrawing money from a 401(k) plan before age 59 and a half would make it subject to ordinary income taxes, plus a 10 percent penalty. The penalty doesn't apply, however, if you're 55 and have left the company.
The much better option if you're switching jobs, according to Hogan, is to roll your 401(k) into a traditional IRA or Roth IRA.
“You want to remain in control- the best thing to do is to roll that 401(k) over into an IRA,” he said. “The thing that makes me nervous about this new proposed law, is that the employees could cash out if the employee doesn’t roll it over if it’s $1,000 or under. This makes me nervous because a lot of people will forget to roll it over, and if it is cashed out early they’re gonna have penalties and taxes on this money.”
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The bottom line: Don't forget your 401(k). It's an invaluable investment tool that makes saving for retirement nearly effortless.
“I would much rather people tighten up their belt with their budget, take on an extra job, but leave that money (401k) for your future alone,” Hogan said.