Wednesday, February 8, 2023
Homenew road to retirementIf you’re quitting your job as part of the 'Great Resignation,' here’s...

If you’re quitting your job as part of the ‘Great Resignation,’ here’s what you need to know about your 401(k)

  • More than half of workers say they're going to find a new job in the next year, according to a recent survey.
  • There are a few options for handling a 401(k) plan when you leave your company, although sometimes the choice is made for you.
  • If you have an outstanding loan, it could morph into a taxable distribution subject to a penalty.

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If you're among the many workers hoping to find a better position elsewhere, be sure to pay attention to the 401(k) plan account you're leaving behind.

Roughly 55% of workers say they're going to look for a new job in the next year, according to a recent Bankrate survey. Dubbed the "Great Resignation," the hunt for greener pastures comes more than a year into the Covid pandemic and, for many people, working from home — leading some of them to seek greater flexibility and higher pay.

While not all employees have a 401(k) or similar workplace retirement plan, those who do should know what happens to their account when they leave a job and what the options are — and aren't.

"I know it can be stressful changing jobs, but just don't forget about your 401(k)," said certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

Here's what to know.

First, outstanding loans

Among 401(k) plans that allow participants to borrow money, roughly 13% of savers have a loan against their account, according to Vanguard research. The average loan balance is about $10,400.

If you leave your job and still owe, there's a good chance your plan will require you to repay the remaining balance fairly quickly; otherwise, your account balance will be reduced by the amount owed and considered a distribution.

In simple terms, unless you are able to come up with that amount and put it in a qualifying retirement account, it is considered a distribution that may be taxable. And, if you are under age 55 when you leave the job, you'll pay a 10% early withdrawal penalty. (Workers who leave their company when they reach that age are subject to special withdrawal rules for 401(k) plans — more on that below.)

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