What Happens to My 401(a) When I Quit?

A 401(a) plan is an employer-sponsored retirement plan defined by the Internal Revenue Code, primarily designed to house contributions made by an employer for its employees. These plans are commonly offered by governmental, educational, and non-profit institutions. While 401(a) plans share similarities with 401(k)s, they often involve employer contributions that may be mandatory or non-elective, meaning they are made regardless of employee contributions.

Upon leaving employment, individuals with a 401(a) plan face decisions regarding their accumulated retirement savings. This article guides readers through the choices available for their 401(a) funds, helping them understand the implications of each option. The decisions made at this juncture can significantly impact long-term financial security and retirement planning.

Understanding Your Post-Employment Options

When separating from an employer, individuals with a 401(a) plan have several options for their retirement funds. Each choice carries distinct implications for the accessibility and future growth of the savings.

One common choice is to leave the funds within the former employer’s 401(a) plan, provided the plan administrator allows it. This option permits the money to continue growing on a tax-deferred basis, without immediate action required from the former employee. However, this may mean continued adherence to the former plan’s investment options and administrative rules.

Another widely used option involves rolling over the funds into an Individual Retirement Account (IRA). This allows for consolidation of retirement savings and often provides a broader range of investment choices than an employer-sponsored plan. The rollover can be performed to either a traditional IRA or, if eligible and willing to pay taxes on the conversion, to a Roth IRA.

A third possibility is to roll over the funds into a new employer’s qualified retirement plan, such as a 401(k) or another 401(a), if the new plan accepts such rollovers. This can simplify retirement savings management by keeping all funds within a single employer-sponsored account. This option maintains the tax-deferred status of the funds within a workplace plan.

Finally, some individuals opt to take a direct cash distribution, or “cash out,” their 401(a) balance. While this provides immediate access to the funds, it often comes with significant tax consequences and potential penalties. This option is generally considered a last resort due to its financial drawbacks.

Key Factors When Deciding on an Option

Deciding what to do with a 401(a) plan after leaving employment involves evaluating several important factors, each with financial consequences. Tax implications are a primary consideration, as they directly affect the net amount received or the future growth of the savings. Leaving funds in the former employer’s plan or rolling them over to an IRA or new employer’s plan allows the money to continue growing tax-deferred, meaning taxes are paid only upon withdrawal in retirement.

Taking a direct cash distribution makes the entire amount immediately taxable as ordinary income in the year of withdrawal. Distributions taken before age 59½ are subject to a 10% early withdrawal penalty on top of regular income taxes. For indirect rollovers, where funds are first received by the individual, a mandatory 20% federal income tax withholding is applied to the distribution amount, even if the intent is to roll it over. To avoid the penalty and taxation, the full amount, including the withheld portion, must be deposited into a new qualified account within 60 days.

Investment control and options vary significantly among the choices. Leaving funds in a former employer’s plan may limit investment choices to those offered by that specific plan, which can be restrictive. Rolling over to an IRA provides a much broader array of investment vehicles, including various mutual funds, exchange-traded funds, and individual stocks or bonds, giving the individual greater control over their investment strategy. Moving funds to a new employer’s plan means aligning with that plan’s investment offerings, which may or may not be as diverse as an IRA.

Creditor protection is another important aspect. Qualified retirement plans, such as 401(a)s, receive strong protection from creditors under the Employee Retirement Income Security Act (ERISA). This federal protection shields assets within these plans from most creditors, including in bankruptcy. When funds are rolled over to an IRA, the level of creditor protection can change, often depending on state laws, which may offer varying degrees of protection compared to the federal shield of ERISA.

Required Minimum Distributions (RMDs) also differ based on the chosen option. RMDs from traditional IRAs and most employer-sponsored plans must begin when the account owner reaches age 73. If funds remain in a former employer’s plan, RMDs apply at this age, though some plans may allow a delay if the individual is still employed by that specific employer and is not a 5% owner. Roth IRAs are not subject to RMDs for the original owner during their lifetime.

Access to funds is another practical consideration. Taking a cash distribution offers immediate access but at the cost of taxes and penalties. Loans or hardship withdrawals, while sometimes available in employer plans, are generally not options once employment has ceased. Funds rolled into an IRA or a new employer’s plan generally remain subject to similar withdrawal rules as the original 401(a), with penalties for early withdrawals before age 59½.

Preparing for Your Chosen Action

Before initiating any action with your 401(a) funds, thorough preparation is essential to ensure a smooth process and avoid potential pitfalls. Begin by locating and reviewing your 401(a) plan summary or recent statements. These documents contain crucial details about your specific plan rules, available options, and contact information for the plan administrator.

Confirm your vested account balance. Your vested balance represents the portion of the employer’s contributions, along with all your own contributions and earnings, that legally belongs to you and can be taken when you leave the company. Employer contributions may be subject to a vesting schedule, which determines when these funds become fully yours.

Gather all necessary account numbers from your former 401(a) plan, and if applicable, from the receiving IRA or new employer’s retirement plan. This includes any specific codes or identifiers required for transfers. Ensure your personal information, such as your current address, Social Security Number, and date of birth, is accurate and up-to-date with the plan administrator.

If you plan a rollover, obtain the exact name and account details of the receiving financial institution and the specific account. This precision is important for direct rollovers to ensure funds are transferred correctly and without unnecessary tax complications.

Executing Your Plan Distribution or Rollover

The process begins by contacting the plan administrator of your former employer’s 401(a) plan. This can be done through a dedicated phone line, online portal, or by sending a written request.

Request the specific distribution or rollover forms required for your chosen option. The plan administrator will provide these forms, which are designed to facilitate the transfer or withdrawal of your funds. Carefully read all instructions provided with the forms.

Complete the forms accurately using the information you prepared, such as account numbers and recipient details. Ensure all required fields are filled out correctly and that your signature is provided where necessary. Any errors or omissions could lead to delays in processing your request.

Submit the completed forms according to the plan administrator’s instructions, which may include mailing, faxing, or uploading them through a secure online portal. After submission, it is advisable to follow up to confirm receipt of your request. Keep records of all communications and submitted documents.

Monitor the progress of your distribution or rollover. The plan administrator should provide updates on the status of the transaction and confirm when the funds have been successfully moved or distributed. Expect to receive IRS Form 1099-R, “Distributions From Pensions, Annuities, Retirement, or Profit-Sharing Plans,” in the following tax year, which reports the distribution and any associated tax implications.