Preparing for Retirement? Here Are 3 Events That Affect Your 401(k) Plan
A 401(k) is a fantastic way to prepare for retirement. But accessing the funds before certain criteria is met will cause you to incur penalties and lose out on some of those hard-earned savings. Use the guide below so you understand what life events affect your 401(k) – including ones that give you penalty-free access to the funds.
Life events that impact your 401(k) plan
A job change
On average, Americans switch jobs about once every four years.1 If you have a 401(k) with a former employer, what you do with it will depend on several factors, including how much you have in the account. Note that these rules may differ based on the specifics detailed in your summary plan description.
If the balance is under $1,000 your former employer will likely issue you a check for the amount. After the check is received, you’ll have 60 days to deposit it into a new 401(k) or roll the amount over into an Individual Retirement Account (IRA). If you fail to do so, it’s considered an early withdrawal and you’ll have to pay a 10% penalty in addition to taxes on the amount you’re cashing out.
If your balance is between $1,000-$5,000, a former employer can take the funds and move them into an IRA of their choosing (you’ll have the option to switch to a different one after the fact). They must notify you of this change.
If your balance is over $5,000, your former employer will likely allow you to keep it where it is. Only contributions made during your tenure with the company count toward this threshold, not funds rolled over from a previous job.
Some employers match their employees’ 401(k) contributions. If they do, they may also require the employee to stay with the company for a period before they “own” the matched funds – something known as vesting. If you change jobs before hitting this requirement, you may lose all or a portion of these matched funds.
A milestone birthday
The big 6-0 comes with perks – even before you’re ready to blow out the candles on your cake! That’s because you can take penalty-free withdrawals from a 401(k) once you reach the age of 59 ½. Want to wait and let your funds continue to grow? No problem, the IRS won’t require you to start taking withdrawals until you reach 72 years of age.
Iwho are totally and permanently disabled are exempt from the 10% early distribution penalty even if they withdrawal 401(k) funds prior to turning 59 ½. The IRS will require a doctor’s statement in addition to medical records to verify these disability claims.
401(k)s can be complicated, and there are a handful of caveats to the rules list above. For this reason, it’s best to review your options under the guidance of a financial adviser. They can help you pinpoint the best course of action. As a General Electric Credit Union (GECU) member, you have access to a no-cost consultation with Investment Services, available through CUSO Financial Services, L.P. (CFS)2, to start preparing for retirement. It’s never too late to invest in your future, so don’t hesitate to contact one of our dedicated advisors, today!