Can I Keep 401k With Old Employers?
If you’ve changed jobs recently, find out if you can keep 401(k) with old employer, and the alternative options you might have.
When you switch jobs, you have several options with your 401(k). You can decide to leave it where it is, rollover to a new employer, or transfer the money to an individual retirement account (IRA). Each of these options has different tax implications, and you should understand the particulars of each option before deciding the option to take.
You can leave your 401(k) in your former employer’s plan if you meet the minimum balance requirement. Employers require employees to have at least $5,000 in 401(k) savings if they decide to leave their money behind indefinitely. This option does not require any action on the employee's part, and you can leave your job without doing anything to your 401(k) money. The employer will continue managing the 401(k) funds, but you won't be able to make contributions to the retirement account once you leave.
Leaving 401(k) with Old Employer
When you change jobs and you have a 401(k) account managed by your soon-to-be former employer, you can choose to do nothing and let the employer continue managing the retirement assets. You can choose this option if you have a substantial amount in your retirement account, and you are comfortable with the plan portfolio. You must have at least $5,000 invested in your 401(k) account if you decide to leave it with the employer. The 401(k) balance must be from money deposited into the plan from earnings from the job. Rollovers from previous employers are excluded in determining the qualified 401(k) balance.
If your 401(k) balance is below $5,000 but more than $1,000, the employer will transfer the 401(k) assets to an IRA of its choice. The transfer can take up to 60 days depending on the events surrounding the exit. Once the funds are transferred to the new retirement account, you can access the money the same way you would access your 401(k). For 401(k) balances below $1000, the employer will automatically cash out the money and send you a check with your balance.
Pros of leaving 401(k) with Old Employer
Some of the reasons you may want to leave the 401(k) with the employer include:
Some employers may give participants access to institutional share class mutual funds and other low-cost investment options. If your employer offers these investments, it might be impossible to roll these investments into an IRA or new 401(k). You can choose to leave the 401(k) behind to continue holding onto the investments.
If you are moving to a new employer, and you are unaware of the investment options in your new employer’s 401(K,) you can choose to stick with the former employer’s 401(k) investment options. This allows you time to familiarize yourself with the new employer’s 401(k) until you are ready to roll over the plan.
Cons of Leaving 401(k) with Old Employer
Once you leave your employer, you have limited withdrawal options. If you decide to make a withdrawal, you can only take the entire 401(k) balance and not a partial withdrawal. Also, you can’t take a 401(k) loan against your 401(k) savings.
When you leave a 401(k) account with the employer, the plan administrator charges various fees such as bookkeeping, administration costs, and legal charges to manage the account. Over time, these fees can reduce your 401(k) balance if the returns are lower than the fees charged.
You won’t deposit money into the account
You won’t make further contributions to the 401(k) account after leaving your job. This limits the 401(k) growth potential since it will only grow based on the balance at the time of your exit from the company.
Minimum required distributions
Once you attain age 72, you must take the required minimum distributions (RMDs) from the 401(k) account and pay income taxes.
Alternatives to Leaving 401(k) with Old Employer
Apart from leaving your 401(k) with your former employer, you can consider the following options:
Rollover to New Employer
A better alternative to leaving your 401(k) behind is to rollover the old 401(k) to the new employer’s 401(k) plan. This option allows you to combine your retirement savings so that you have better control over your 401(k) assets. You can ask the plan administrator of the old 401(k) account to transfer the 401(k) balance directly into the new employer’s plan. You can also ask the plan administrator to send you the check, which you must deposit in the new employer’s 401(k) in 60 days.
If the new employer allows 401(k) loans, you have a bigger asset base against which to borrow. You can borrow up to 50% of your 401(k) assets. The highest amount you can borrow from a 401(k) is $50,000.
Rollover to IRA
The most flexible option when you leave your employer is to rollover to an IRA. An IRA gives you absolute control over your retirement funds, and you can decide how, where, and when to invest your funds. IRAs have a wider selection of investment options than what is available in a 401(k), and you can build a portfolio of investments with the lowest fees.
If you decide to rollover to a Roth IRA, your retirement money will grow tax-free since the retirement account is funded with tax-free dollars. You can make tax-free withdrawals from the Roth IRA account if you have owned the account for 5 years or more, and you’ve attained age 59 ½. Also, unlike a traditional 401(k) and traditional IRA, a Roth IRA does not require participants to take the required minimum distributions when they reach age 72.