With the onset of the coronavirus, many office workers have lost their jobs. The economic recovery over the past two years has helped many people find jobs again, and recently 51% of workers are seriously considering a new job and are actually moving to a new job, Fidelity finance company reports.
When changing jobs or preparing for retirement, it is necessary to decide what to do with retirement accounts such as a 401(k), 403(b), 457, TSP, etc. It can be said that this is a big financial mistake. When looking for cash in a retirement plan, if you are younger than 59.5 years old, you will have to pay a 10% fine, as well as pay taxes on income for that year.
More important than taxes or fines is deferring taxes and giving up opportunities for long-term investments that can become big retirement funds. What we all need to remember is that it is very difficult to maintain a long-term retirement life only with Social Security, which can be received after retirement.
When you change jobs, you can move your retirement funds from your job in the following three ways without first turning them into cash. You can leave it at your old job, move to a new job, or move to a financial institution like Vanguard or Fidelity.
Retirement accounts are generally preferred to be transferred to a financial institution. One of the reasons is that retirement accounts at work must follow the rules set by the workplace. One example is a rule that allows only a few purchases and sales per month in a retirement account. In addition, since the retirement account at work has a limited number of investments, it is difficult to form a proper portfolio and the investment cost may be higher.
The process of transferring all or part of the retirement funds from a retirement account to another financial institution’s retirement account is called a rollover. If your employer sends you the full amount of your retirement account by check, you have 60 days to send it to your new financial institution retirement account. If you exceed 60 days, you will be deemed to have found your retirement funds, and you will have to pay income tax and fines on the full amount, and remember that a wrong decision cannot be reversed.
This is the process of doing a rollover properly. Let’s say the name of the person who has a retirement account is ‘John Doe’. First, the financial company to which the retirement funds will be transferred is selected. As an example, let’s say you decide to move to Vanguard. When you open a Rollover IRA account with Vanguard, an account number is created. Then, contact the company where you worked and tell them that you will transfer your retirement funds (401k) directly to Vanguard. The company requires the retiree to fill out and submit company documents. When you fill out the paperwork, you usually have one of two options to move your retirement account.
First, enter the account number of the retirement fund (usually a Traditional IRA) formed in Vanguard. The company then transfers the retirement funds directly to the retirement account in Vanguard. It is best to move it this way. This is because you can avoid taxes and fines that may occur in the process of moving.
Second, some companies send checks to retirees first. In this case, the company asks you to write the check in Vanguard (Vanguard FBO Hong Gil-dong) instead of in the retiree’s name, Gil-dong Hong. The check received in this way does not need to be signed by the retiree, only the Vanguard retirement account number is written on the check and sent to Vanguard.
There are many things to do with a new job or retirement. I am unfamiliar with the process of moving my retirement account, and even deciding on investment stocks comes with a lot of pressure on my mind. For these reasons, I keep delaying moving my retirement account. It is recommended that you choose a financial company with low investment costs and collect all your retirement funds in one place to form a proper portfolio and manage it.
Myung-Duk Lee, Ph.D., Registered Investment Adviser (RIA)
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