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What should I do with my 401(k) when I leave for my sabbatical?

You’ve given your notice to your company. You’re getting ready to leave on your sabbatical. But before you go, you still have a few things to take care of…like what should you do with your 401(k) now that you’ve quit your job? 

Many people think you have to move your 401(k) when you leave companies, but it’s very possible that you don’t have to do, well, anything. At least not right away.

There’s no rush! Don’t let anyone pressure you to make a move if you aren’t ready to. Especially if you don’t know what the next move will be. There is generally no urgency in deciding what your next step for your 401(k) account will be. It’s important to make the right choice for you, not the fast one.

sabbatical-planning

What should I do with my 401(k) when I leave for my sabbatical?

Here are 2 options you may want to consider:

1. You don’t know what you want to do with it yet? You can choose to leave it where it is

If you don’t know what your next big thing will be, that’s okay. You can typically leave the account where it is as long as it has more than $5,000 in it.  

 

But before you go totally hands-off, here are some things to look into: 

 

  • Check the investment options

Does the 401(k) plan offer asset allocation funds, like Target Date funds? If so, you may choose to move your 401(k) funds into one so that you don’t have to work portfolio rebalancing into your sabbatical schedule. These funds automatically rebalance so you are able to maintain the appropriate risk level without having to log in and make any changes yourself.

 

  • Will you be responsible for any administrative or transaction fees after you leave your company?

Typically 401(k) plans have relatively low fees. Once you are no longer contributing, though, it’s good practice to ask what fees you will take on when you are no longer an employee. Sometimes the previous employer may choose to pass fees along to non-active participants, so it’s good to know before you get surprised. 

 

2. Interested in tax strategizing? Consider rolling your pre-tax 401(k) into a Rollover IRA so you can do Roth Conversions

While you’re on sabbatical, you may choose to take a more proactive approach and optimize your lower-income year(s). One idea is to roll your 401(k) into a Rollover IRA so you can do Roth conversions.

 

Things to know: 

 

  • Avoid tax consequences & penalties

Rolling your 401(k) into a Rollover IRA should not have any tax consequences or penalties, as long as it goes directly from the 401(k) plan to the Rollover IRA. No distributions should be made to you as an individual – all distributions should be made out to your Rollover IRA to maintain the same tax treatment.

 

  • Once the funds are in your Rollover IRA, you may decide to: 
    • Be a DIYer and manage your Roth conversions yourself
    • Outsource the tax strategizing and implementation to a financial advisor while you are busy doing other things you actually like doing 🙂

In both scenarios, you have the option of rolling the account into a new 401(k) plan with your next employer when you get back from your sabbatical.

 

PSA: Avoid taking distributions from your 401(k) or Rollover IRA before the age of 59 ½.

 

This will result in taxable distribution at your ordinary income rate + 10% early distribution penalty. 

 

We don’t generally consider retirement savings accounts as a source of funding for your sabbatical. Instead, we can help you create a savings strategy that will help you enjoy the present moment without derailing your future plans. 

If you need help deciding what to do with your old 401(k) now that you’re getting ready to leave for your sabbatical, let’s chat! We help you think through things now so you can leave feeling like everything is being taken care of! Contact us now.

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This blog post is provided for educational, general information, and illustration purposes only. Opinions expressed herein are solely those of Middleton & Company, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness.
 
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