Qualified Retirement Plans
A 401(k) plan is one of several qualified retirement plans that are invested from pre-tax dollars. Employers typically offer these plans as part of their compensation package to employees. In addition to the employee being allowed to deposit up to a specific amount from each paycheck as deferred compensation, many companies match all or part of the funds that are deposited to 401k plans. Because part of the funds are matched by employers, this means that the funds that are deposited by the employee are fully vested on the date of deposit, but that the employer funds are not vested immediately; in fact, they are vested over the length of service. Vesting plans mean that employees do not always know the answer to the question: if I quit my job can I get my 401k? The simple answer is yes, but it may be more complicated than that in reality.
Employees who leave a job are entitled to transfer their 401k account to another custodian, to transfer their 401k to another employer or are allowed to liquidate their account. However, not 100% of the money that is in the 401k may be able to be transferred. Here are the things that employees need to understand about moving funds from a 401k plan.
A) Vesting schedule - the first thing that an employee needs to be aware of is how the funds are vested in the plan. Employees who have been long-term employees may find that most of the funds that the employer has deposited on their behalf are fully vested while those who have been short-term employees may find little (if any) of the funds actually credited to them.
B) Qualified versus non-qualified - employees are allowed to transfer their 401k into other plans. However, these funds cannot be co-mingled with other non-qualified investment plans. The most significant difference between qualified and non-qualified plans is that funds in non-qualified plans are deposited from after-tax earnings while qualified funds come from pre-tax earnings.
C) Withdrawing as cash - employees may wonder if they can withdraw their 401k accounts as cash. The vested portion of the account may be withdrawn as a lump sum cash distribution but is subject to tax withholding. Typical withholding is 20% and if the funds are not rolled into another qualified plan within sixty days, the IRS may impose additional penalties and taxes.