Leaving a job can be daunting, and even more so if you have retirement savings to handle. Fortunately, you don’t need to worry – there are a few things to do with your 401(k) if you’re starting a new stage in your work life.
Switching Jobs and Your 401(k)
You’ve worked hard to keep your retirement accounts, saving money for years. However, if you’re like most Americans, you’re likely to change jobs a few times during your career.
When you leave a job, your 401(k) will stay with your former employer until you do something about it. If your retirement account balance isn’t too small, you may be able to leave it there for a while.
However, there are other options as well. Depending on the one you choose, you may have to deal with tax consequences, though, so you must know the particulars of each available alternative before picking which route to take.
Option One: Keep Your Retirement Savings with Your Previous Plan
You can leave your retirement savings on your former employer’s plan if the 401(k) lets you maintain your retirement account and you’re happy with your investment options.
In many cases, keeping your previous employer’s plan is the best alternative. Nonetheless, you still have to evaluate other investment options.
Each year, American workers lose track of their retirement accounts, and it costs them millions of dollars. Therefore, you have to be on top of things when it comes to yours.
To correctly manage your retirement account, you have to view it as part of your portfolio. Plus, you must keep beneficiaries up to date. Avoid waiting until the last moment to organize your documents. Instead, start as soon as you can and make sure everything’s working smoothly.
What You Must Consider:
Just because many people choose to leave their retirement savings in their former employer’s plan doesn’t mean you should. There are a few factors you need to consider if you choose this alternative, which is why you shouldn’t forget about other investment options so quickly – they may work for you.
Here’s what to keep in mind if you’re leaving your 401(k) in your previous plan:
The Amount of Money in Your Account
In many cases, workplace retirement accounts allow workers to save money while they’re there, but if you have less than \$5,000, you may have to take it out.
If there’s less than $1,000 in your account, your former employer will most likely write you a check for the correct amount.
Regardless of the case, if you have the money, you’ll have to deposit it into your new employer’s plan or into an individual retirement account (IRA) within 60 days of receiving it. Otherwise, you’ll have to pay taxes, and if you’re under 59 and a half, you’ll get a 10% withdrawal penalty.
Employer Stock
Your retirement savings could include publicly traded company stock, and if its value has significantly grown, you’ll lose the tax breaks you received in the in-kind distribution once you take the option of rolling over your 401(k) into your new employer’s plan or to an individual retirement account.
Vesting
Money will typically vest over time if your previous employer contributes matching funds to your 401(k).
If you’re not completely vested when switching jobs, you may get to keep a portion of the match or none of it. To understand your company’s vesting schedule, you’ll have to talk to a plan administrator.
Related Reading: Can You Borrow Money from Your IRA?
Fees
A 401(k) account is one of the best investment options to secure your financial future and put some money away for retirement. However, it also comes with transaction and maintenance fees that you’ll have to pay if you want to keep it.
On a long-term basis, fees could have a significant impact on your returns. Therefore, make sure you know exactly how much you’re spending on fees when you evaluate all your alternatives.
Option Two: Transfer Funds to Your New Employer's Plan
When you change jobs, you can also move your funds to your new employer’s retirement plan. Depending on the case, it could have better options to support your goals or lower fees.
Keeping track of your retirement savings will be a much more straightforward process if you roll your funds into your new company’s plan. Plus, you’ll have everything in one place. Even so, the best option is to talk to an advisor who can help you compare both alternatives.
Think about This:
Rolling over a 401(k) into a new retirement plan requires some thought, and there are a few aspects to keep in mind before doing it. Here’s what you must consider:
Direct Rollovers
If you pick a direct rollover, you’ll be able to roll your 401(k) funds from your previous retirement plan to your new one without having to pay taxes.
After doing that, you can work with the plan administrator that your new employer offers you to find the best options and conveniently allocate your savings.
Transfer Rules
There are several transfer rules when it comes to transferring funds, especially if you want to avoid paying income tax.
If you don’t do a rollover and get a check with the funds of your former plan, you’ll have to deal with a mandatory 20% withholding. What’s more, if you fail to deposit the check in the first 60 days of receiving it and you’re under 59 and a half, you’ll get a 10% withdrawal penalty plus taxes.
Loans
In some cases, your previous employer might’ve had a plan that allowed you to borrow money from your 401(k).
When you roll over your 401(k) to your new retirement plan, you could have a larger balance to borrow from.
Over time, you’ll have to pay yourself back, usually with interest. In addition, loans are usually only an option for active employees.
The best way to approach this is to carefully consider all the alternatives before taking a loan against your account because there are many implications to think about. Talk to an advisor if you need help.
Option Three: Roll Over Your Retirement Savings to an IRA
Rolling over your 401(k) to an IRA is another option. It’s one of the most beneficial ones since you’ll have access to other types of investment options.
At the same time, if you get a new retirement account, you’ll have complete control over it instead of being a participant in a plan.
Depending on the investment choices you make, rolling over will also help you save money from administrative and management fees, which could eat into your savings over time.
You Have Different Options
If you decide to roll over your 401(k) into an IRA, though, you’ll have different alternatives, and each one has unique implications when you pay income tax, which can affect your financial future.
Traditional IRA Rollover
You can roll over your old 401(k) into a traditional IRA, and you won’t have to pay any taxes for moving the money.
In addition, new earnings will be tax deferred as well. You’ll only have to pay when you start withdrawing money.
Roth Conversion
Some people qualify for rolling over a part of their 401(k) into a Roth IRA. Although it’s similar to a traditional fund rollover, you’ll have to pay taxes for the money you’re converting.
Although it may be difficult to understand at first, remember that Roth retirement accounts use after-tax dollars, while traditional ones rely on pre-tax money.
After making the conversion, all the earnings you accumulate will be eligible for a tax-free withdrawal. However, you can only do this if your Roth IRA has been with you for at least five years and you’re at least 59 and a half.
Rolling Over Your Roth 401(k) to a Roth IRA
Unlike traditional IRAs, Roth IRAs require after-tax money. Therefore, you must meet certain specific conditions to accumulate tax-free earnings.
Other Considerations:
Although having an IRA is convenient for some, the reason why so many people choose employer-sponsored retirement accounts is that managing them can be relatively easier.
If you take a look at your previous employer’s plan, you may notice you had much less to worry about than you would if you had an IRA.
However, IRAs allow you to have many more investment options. Depending on the case, you could even buy precious metals.
When you switch jobs, your number one priority could be making sure you have a safe financial future, so you must pick the alternative that helps you with it. Here are some other considerations to keep in mind when it comes to rolling over into an IRA:
Contribution Limits Don’t Apply to Rollovers
Traditional IRAs often have a contribution limit. You may not be able to deposit more than $6,000 a year.
Nonetheless, this doesn’t apply to rollovers. On the contrary, you can transfer the funds, no matter how much money you have.
Taxes
You’ll get a taxable income on your tax return when you do a Roth conversion. Therefore, you may have to pay a lot to the IRS.
Minimum Distributions Required
If you’re 73 and still working, you’ll have to start taking minimum distributions. Penalties for not taking those are steep.
Alternatively, you’ll get no minimum distributions if you have a Roth IRA account, which could be more convenient if you want to decide when to start using your money.
Option Four: Cashing Out Your 401(k)
The last alternative is to cash out your 401(k), which is exactly what it sounds like: you’ll get the bills. There are many implications to consider, though.
If you get the cash, it’s income, so you may incur state, local, and federal taxes. When this happens, you lose the benefit of giving your account the time to grow its income, and you could have to work longer if you want it to make a difference.
In addition, if you leave your employer before you turn 55 and you’re younger than 59 and a half, you may have to pay a 10% withdrawal penalty besides taxes.
How Does a 401(k) Work When You Change Jobs?
There are many options to consider when you have a new employer. It’s a transition, so you must first make sure you understand all the alternatives before choosing one.
Picking an option depends on many factors, for example, your relationship with your previous employer, how much money you had on the plan, and whether or not you have to take it out.
You don’t want to take out your retirement savings unnecessarily. In some cases, people prefer not to go through the hassle of rolling over their accounts or transferring funds, so they leave them with their previous employer because they know it’ll be safe there, even if it doesn’t provide them with many monetary benefits.
Overall, the best way to work things out when you have a new employer is to consider all the options and then choose one or get expert assistance to help you pick the best alternative.
Why You Should Figure Out What to Do with Retirement Money When Changing Jobs
Having a new employer can be a challenge because you need to adapt to an unknown work environment, colleagues, bosses, and much more.
Plus, if you’ve been saving money for a long time and were hoping to get some tax-free options, things may look murky when you have to switch jobs and find yourself not knowing what to do with your earnings.
Figuring out what to do with your savings is essential, and you have to make a decision as soon as possible. The ideal way to go is to do things calmly, but there are deadlines you must meet if you don’t want to pay penalties. Therefore, try to pick the best alternative, but don’t take too long, or you’ll have to deal with the consequences.
What Is the Best Thing to Do with Your 401(k) When You Change Jobs?
There is no specific answer to this question. Depending on your case, a Roth IRA could be convenient. However, others prefer leaving their savings in their previous account or rolling them over to their new employer’s plan.
The best alternative is the one that will provide you with convenient options in the long run, and it’ll help you secure your future. Consequently, you have to take a look at all the possibilities and pick the one you think will benefit you the most.
Is a 401(k) Transferable?
As the article mentioned, you can transfer your 401(k) to the plan that your new employer offers you.
In many cases, when you switch jobs, you may have wanted the change because your new workplace will offer more benefits than the old one. Therefore, getting a better retirement plan is not uncommon.
If you’re unsure of whether or not to transfer your funds, you should talk to an advisor. They’re professionals, and they’re trained to guide you through the process and help you decide.
Do You Have to Roll Over Your Retirement Savings When You Change Jobs?
You don’t have to necessarily roll over your retirement savings, but many people choose to do it because they find an option that provides them with more benefits.
There are many things to keep in mind when you change jobs, for example, employer contributions, IRA types and their features, and rollovers.
Since you have so many options, you need to take some time to decide if rolling over your funds is the best idea.
What About Your New Employer's Plan?
You can’t make a choice until you check out what your new employer offers. In some cases, the new plan could be more convenient than your previous one, and it may allow you to have all your funds in one place.
However, if you don’t like the new plan, you don’t have to transfer your funds into it. Instead, you could get a traditional or Roth IRA.
You Don't Have to Leave Your 401(k) with a New Job
It’s imperative you know that you don’t have to feel stuck in one option. Instead, there are numerous alternatives available. You’ve probably worked for some time, so you’ve earned the chance of getting to choose how you’ll spend your retirement years.
The process may be challenging because you don’t have forever to make a choice. Therefore, if you feel lost and don’t understand which option could be better for your specific case, don’t hesitate to ask for help.
Frequently Asked Questions
What Happens to Your 401(k) If You Change Jobs?
It depends on your specific case, but you may have to take the money out, transfer it to a new plan, or get an IRA.
What Happens to Retirement Accounts When You Change Jobs?
You could leave the money in your previous plan, but if it’s too little, you may have to take it out. Furthermore, you can also transfer funds or roll them over.
What Can You Do with a 401(k) When Changing Jobs?
When you change jobs, you must pick the most convenient option for you. Therefore, evaluate what will give you more benefits in terms of your long-term finances, and then decide.
Final Thoughts
Most people change jobs at least a couple of times in their lifetime, and just because you’re in a new work environment doesn’t mean your financial future has to be chaotic. If you choose wisely, you’ll get to enjoy retirement the way you’ve always wanted.
About Tim Schmidt
Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He started IRA Investing to share his expertise in using his Self-Directed IRA for alternative investments. His views on retirement investing have been highlighted in USA Today, Business Insider, Tech Times, and more. He invested with Goldco.
