What to Do With Your 401k After Leaving a Job?
When you leave a job, it’s important to take your 401(k) with you. But what exactly should you do with it?
When you quit your job, you have a few options when it comes to your 401(k).
- Leave it
- Cash it out
- Rollover to your new employer’s 401(k)
- Rollover to an IRA
Which option is best for you depends on how much you have in your 401(k), your former 401(k) plan’s guidelines, and your future goals.
Let’s go into each in more detail so you can better prepare before you walk out of the building for the last time.
While you can’t make any further contributions to your 401(k) if you leave it with your former employer, it may be a solid option if your former plan has any beneficial features or attractive investment options.
Leaving your 401(k) with your former employer really depends on how much you have in it. Most employers allow former employees to leave their 401(k) indefinitely if they have $5,000 or more in their account. However, if you have less than $5,000 in your account, the employer may cash out the remaining balance and send you a check. You’ll then have 60 days within which you must deposit the funds in an eligible retirement account to avoid paying income taxes and penalty taxes on the distribution amount.
Leaving your 401(k) with your former employer should be a temporary strategy as you find a new retirement plan to transfer your funds. Many employers require new hires to wait 90 days before being eligible for their benefits package—including their 401(k) plan.
However, if you leave your 401(k) for an extended period, you won’t be able to monitor the account as closely as you should. Because of this, many 401(k) account holders choose to transfer their funds into another retirement account.
Rollover to your new employer’s 401(k)
If your new employer has a 401(k) plan, you can transfer your retirement savings directly to the new employer’s 401(k) plan. You can elect for a direct transfer or an indirect transfer.
A direct transfer is the easiest of the two. You simply request your former plan administrator to transfer the 401(k) funds over to your new 401(k) account. All you’ll need to do is provide them with the information for your new plan. Direct transfers are also the quickest way to get your 401(k) funds into your new account. It should only take a few businesses days from the time you request the rollover to when the funds show up in your new account.
An indirect transfer is when your former plan administrator sends you a check for the funds. You’ll then have 60 days in which to deposit them into your new 401(k) in order to avoid taxes and penalties.
It’s best to check with your new employer to get the details of their 401(k) plan. Then, evaluate the plan to know the fees, rules, investment options, if the new employer offers a matching program, and if you will start participating in the plan immediately. If your new employer’s plan doesn’t fit your goals, you may be better off rolling over your old 401(k) into an IRA.
Rollover to an IRA
If your new employer doesn’t have a 401(k), you don’t have to leave your old 401(k) with your former employer. Instead, you can open a roll-over IRA with an investing institution like Fidelity or Vanguard. IRAs typically provide many more investment options than 401(k) plans like mutual funds, index funds, bond funds, and many more.
To facilitate a 401(k) rollover to an IRA, you have the same options as mentioned previously, direct and indirect rollovers. With a direct rollover, you’ll just need to provide your IRA information to your former plan administrator and can facilitate the transfer for you. With an indirect rollover, you’ll receive a check that will need to be deposited into your IRA within 60 days to avoid taxes and penalties.
A quick disclaimer regarding indirect rollovers: your former employer will withhold 20% of your distribution for tax purposes, and you will receive 80% of the distribution. You must come up with the entire distribution amount and deposit it to your new IRA within that 60-day window.
Instead of leaving your 401(k) with your former employer or rolling it over to a new plan, you can choose to withdraw the entire balance.
However, you won’t receive the entire amount as you’ll be asses taxes and have to pay a 10% penalty tax for the early retirement distribution.
Additionally, you’ll miss out on the future growth that money would’ve received had it stayed invested until you retire.
Forgot your old 401(k)?
If you’re reading this and realized you never did anything with your old 401(k)s from past employers, don’t worry. You can still track down these old retirement accounts and roll them over to your current 401(k) or an IRA.