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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 The vested portion of the account may be withdrawn as a lump sum cash distribution but is subject to tax withholding.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.
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Distribution Process for a 401K Plan
Employees who are separating from service need to know how to withdraw funds from their 401(k) plans. The method of getting the funds transferred will vary slightly between plan administrators. Contacting a human resource or benefits manager will ensure that the proper documentation is received. The withdrawal forms may vary depending on the type of withdrawal that is being made, such as:
Custodian to custodian transfer - custodian to custodian transfers typically occur when an employee has decided to transfer their 401k from their employer to another trustee to manage the funds. This can be accomplished by contacting the new custodian and asking them to initiate the transfer process. Employees will have to sign a form or a letter of intent with the new custodian. This information will then be transmitted by them to the employer for release of the 401k funds.
Transfer to employee for rollover - employees may request that a check be sent to them to be forwarded to a new custodian. This practice is not ideal, but is an option that is available. The proper forms would be obtained from the current plan administrator and the appropriate paperwork must be filed along with a statement that the funds are to be rolled over to a new custodian and that the employee is requesting that no taxes be withheld from the withdrawal.
Liquidation of 401k assets - employees have the right to request that their account be liquidated and that the funds be sent to them directly. In this case, unless a case can be made for a hardship withdrawal, these funds would be liquidated and 20% would be withheld and turned over to the Internal Revenue Service. When filing taxes, the employee may have to pay an additional tax or penalty if the funds have not be put back into a qualified retirement plan.
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Tips and Warnings
Employees will have to be aware of the impact of removing funds from their 401k plan. Custodians may each have different requirements for investing funds. Here are some other tips and warnings that should be kept in mind.
Customer identification program - more commonly called CIP, this program states that the custodian of all funds shall know their customer. Custodians of retirement funds may require copies of identification.
Signature guarantee may be required - depending on the amount of funds that are in a 401k plan, the releasing custodian may require that the transfer forms are signature guaranteed. The stamp may be obtained from a commercial bank.
Liquidation of funds - custodians often have funds invested in non-cash positions. Prior to transfer, unless the receiving custodian has the same funds available, in most cases all positions may have to be liquidated. This can cause a delay for up to three days to allow for settlement of securities.
So knowing what will happen if you quit your job, in relation to getting your 401k, depends on a number of factors. Employees who are leaving their job, and wish to transfer their 401k plan when they leave, are strongly encouraged to speak with the benefits department to find out the requirements of the plan. Each plan works slightly differently and the employee will have to know the exact process as well as understand the company vesting policies.