The decision to leave a job isn’t always an easy one. There are many professional, personal, and financial decisions to consider.
You might wonder if you will have more opportunity, be better able to pursue your career goals, or have a more professional work environment.
If you participated in your company’s 401(K) plan, you may not have considered what you should do with that money once you leave the company. What are your choices?
When you leave a company, you have a few options as to what to do with your 401(K) plan. We will discuss what those choices are and how to rollover your 401(K) plan if that is what you decide to do.
Option 1: Rollover Your Money Into Your New Employer’s 401(k)
If you have accepted a job with a new company who offers an employer sponsored plan, you most likely have the ability to rollover your 401(k).
This is a popular option, especially if your new employer continues to offer a contribution match. By rolling over your retirement account, you might find it easier to manage since it is all located in one spot with your current employer.
Depending on the plan, your new employer’s 401(k) plan may offer more or fewer investment options, so be sure to review what is available to you.
Option 2: Leave Your Money In Your Former Employer’s 401(k) Plan
Legally, if you have at least $5,000 in your account, you can keep your account with your previous employer. You will need to ask your previous employer’s 401(k) administrator how long you have to make the decision.
There pros and cons to each. One pro of leaving your money in your former employer’s plan is that it’s easy. You don’t have to do anything. Your former employer’s plan may also offer better or more diverse option than your new employer, so it could be a better fit for your needs.
Conversely, one major disadvantage of staying in your previous employer’s plan is that you could be charged more in maintenance fees. Many companies contribute to the plan fees, but a company is not as likely to cover the plan fees for someone who no longer works there.
Another disadvantage is that you may be limited in your options. Depending on the plan, an employer may even prohibit you from withdrawing money from your investment account until you are retirement age. And if you ever were considering taking a 401(k) loan or hardship withdrawal, your previous plan administrator would be notified, which can be awkward for former employees.
If you choose this option, it’s a good idea to find out all of the rules and details before you leave your job.
Option 3: Move Your Money into an IRA
If you want to have the ultimate control over your investments, an IRA could be for you. In an employer sponsored 401(k) plan, the employer decides the rules and picks the investments. Though the company’s 401(k) administrators are required to act on behalf of the plan participants’ best interest, they may not be able to provide as many options as you would like.
By choosing to roll your money into an IRA, you gain more control. With an IRA, you can choose the exact investments you want. You can also have more control over the plan fees, which can save you more money in the long run.
Another notable difference between a 401(k) and an IRA is the freedom to name beneficiaries. By law, the immediate beneficiary of a 401(k) must be your spouse unless you have your spouse sign sign a notarized waiver. With an IRA, you have the freedom to name any beneficiary you would like.
One potential disadvantage of rolling your 401(k) into an IRA is taxes. Taxes will be withheld unless you do what’s called a trustee-to-trustee transfer. You can do this by setting up a new IRA first. Then, ask your previous employer to transfer your money directly into the new account.
Option 4: Cash Out
Cashing out of your 401(k) is possible before you are of retirement age, but it’s almost never worth it. There are major tax implications of doing so.
By cashing out of your 401(k), you will owe income taxes on that money. If you’re over the age of 55, you won’t have to pay the penalty for early withdrawal. But everyone else will owe regular income taxes on that amount, which could be around 30%, depending where you live.
This move could even then push you into a higher tax bracket since this disbursement is considered income. Lastly, this move completely destroys any progress you made saving for retirement.
What is the Best Option for You?
When most people leave a job, they will either roll that money into their new employer’s retirement plan or they will open an IRA.
Whatever decision you make, you will want to start by talking to your previous employer’s 401(k) administrator and your investment company. They should be able to outline your options for you and point you as to where to go next.
Related:
- How $5,000 Can Turn Into $1,000,000 for Retirement
- How to Catch Up on Retirement Savings
- Are Millennials Saving for Retirement? The Latest Research
- Why an HSA is the Absolute Best Retirement Account
- 3 Retirement Planning Priorities for Millennials
Have you had to rollover a retirement plan? What did you do when you left a job? How are you saving for retirement if you do not have an employer sponsored plan?
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I went from traditional employment to self-employment. I rolled my old 401k over into an IRA, because the annual account management fee was $50. That’s an extra $50 in my pocket, I can hold the same funds that I had before and still like, plus I can invest in ETFs and stocks that weren’t an option with a 401k.
I’m so glad you noticed the fee. I think a lot of people just accept fees for what they are and don’t shop around for a better deal. Fees can get insanely expensive if you aren’t watching it. I did the same with my 401(k) when I left my last job.