October 19, 2022   //   Financial Planning   //   By PKF Mueller Solutions


Have you quit a recent job, or do you plan on quitting? The pandemic had many employees reevaluate their current employment, leaving for different experiences or more money. In 2021, according to the U.S. Bureau of Labor Statistics, over 47 million Americans voluntarily quit their jobs — an unprecedented mass exit from the workforce. Recent surveys indicate that 40% of the workforce is considering a change in 2022.

Besides the decision to quit, employees are faced with decisions about their 401(k)s. Some options include:

Leave it with your old employer’s plan

In situations where that plan has very low fees or unique investment options, keeping those funds there may be a good idea. If you have less than $5,000 contributed, however, the old employer can only hold that account for 60 days after you leave. Then, it can be rolled over into a new qualified retirement account.

Roll it over to a new IRA

By rolling it over, you can take advantage of the freedom to choose how to invest your money. You may choose investments such as stocks, bonds, mutual funds,  or exchange-traded funds.

Close it out for cash

Cashing out a 401(k) is rarely a good option as your balance will be subject to the mandatory 20% withholding, plus you’ll owe a 10% early withdrawal penalty if you’re younger than 55.  It will actually be taxed at your ordinary rate plus the 10% penalty if you are younger than 55. Depending on the amount of the withdrawal, this could put you into a higher tax bracket than in prior years.

Things to consider
  • With rolling over a 401(k) plan, avoidance of tax and penalties need to be evaluated depending on rolling it to a traditional or Roth IRA.
  • The choice of a direct rollover is key to avoiding withholdings and tax penalties.
  • There are many other considerations, such as the rule of 55 if you leave your job in or after the year you turn 55, you can take penalty-free distributions from your 401(k).
  • If you move the money to an IRA, you lose that ability to tap the money before age 59½, the standard age when you generally can make withdrawals from retirement accounts without paying a penalty.
  • The spouse of someone who plans to roll over their 401(k) balance to an IRA, be aware that you would lose the right to be the sole heir to that money. With the workplace plan, the beneficiary must be you, the spouse, unless you sign a waiver allowing it to be someone else.

If you have questions or want assistance to navigate the choices and guide tax reduction and penalty avoidance decisions, contact your PKF Mueller trusted advisor.