With National Grid transitioning control to PSEG, there are many choices you may have to make concerning your employee benefits. You may be wondering what to do with your 401k plan account? It's important to understand your options.
What will I be entitled to?
If you leave your job (voluntarily or involuntarily) or your company changes (National Grid to PSEG), you'll be entitled to a distribution of your vested balance. Your vested balance always includes your own contributions (pretax, after-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions (and earnings) that have satisfied your plan's vesting schedule.
In general, you must be 100% vested in your employer's contributions after 3 years of service ("cliff vesting"), or you must vest gradually, 20% per year until you're fully vested after 6 years ("graded vesting"). Plans can have faster vesting schedules, and some even have 100% immediate vesting. You'll also be 100% vested once you've reached your plan's normal retirement age.
It's important for you to understand how your particular plan's vesting schedule works, because you'll forfeit any employer contributions that haven't vested by the time you leave your job. Your summary plan description (SPD) will spell out how the vesting schedule for your particular plan works. If you don't have one, ask your plan administrator for it.
Don't spend it, roll it!
While this pool of dollars may look attractive, don't spend it unless you absolutely need to. If you take a distribution you'll be taxed, at ordinary income tax rates, on the entire value of your account except for any after-tax or Roth 401k contributions you've made. And, if your not yet age 55, an additional 10% penalty may apply to the taxable portion of your payout.
If your vested balance is more than $5,000, you can leave your money in your employer's plan until you reach normal retirement age. But your employer must also allow you to make a direct rollover to an IRA or another employer's 401k plan. As the name suggests, in a direct rollover the money passes directly from your 401k plan account to the IRA or other plan. This is the preferable to a "60-day rollover" where you get the check and then roll the money over yourself, because your employer has to withhold 20% of the taxable portion of a 60-day rollover. You can still roll over the entire amount of your distribution, but you'll need to come up with the 20% that's been withheld until you recapture that amount when you file your income tax return.
Reasons to roll over your 401k into an IRA:
- You generally have more investment choices with an IRA than with an employer's 401k plan. You typically may freely move your money around to the various investments offered by your IRA trustee, and you may divide up your balance among as many of those investments as you want. By contrast, employer-sponsored plans typically give you a limited menu of investments (usually mutual funds) from which to choose.
- You can freely allocate your IRA dollars among different IRA trustees/custodians. There's no limit on how many direct, trustee-to-trustee IRA transfers your can do in a year. This gives you flexibility to change trustees often if you are dissatisfied with investment performance or customer service. With an employer's plan, you can't move the funds to a different trustee unless you leave your job and roll over the funds.
- An IRA may give you more flexibility with distributions. Your distribution options in a 401k plan depend on the terms of that particular plan, and your options may be limited. However, with an IRA, the timing and amount of distributions is generally at your discretion (until you reach age 70 1/2 and must start taking required minimum distributions in the case of a traditional IRA).
- You can roll over (essentially convert) your 401k plan distribution to a Roth IRA. You'll have to pay taxes on the amount you roll over (minus any after-tax contributions you've made), but any qualified distributions from the Roth IRA in the future will be tax free.
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Prepared by Broadbridge Investor Communication Solutions, Inc. Copyright 2013. Securities America and its representatives do not provide tax or legal advice.