What Should You Do With Your Old 401(k) When You Start a New Job?
A job loss can wreak havoc on your finances and retirement goals. But whether leaving your job was unexpected or planned, you’ll have some big decisions to make concerning investments bound to your old employer. Specifically, you’ll need to know how to manage your existing employer-sponsored 401(k) plan.
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There are several opportunities open to you upon leaving a job, depending on your employer and your plan. These options include leaving your money with your old employer, transferring your 401(k) to a new employer’s savings plan, investing it in an individual retirement account (IRA) or cashing out the 401(k).
Here are the various options for what you can do with your old retirement plan.
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Leaving Money Invested With Old Employer
“Depending on the plan’s rules, leaving the money where it is might be an option,” said Doug Carey, a chartered financial analyst and founder of WealthTrace. “This can be convenient if the plan has good investment options and low fees.”
There are numerous reasons to let your retirement plan stay the course while you change directions. Familiarity is the main incentive for leaving your 401(k) with your employer. You may not know what action you want to pursue when you leave a job or might simply like the investment choices and costs, management services and protection you already have in place that aren’t available in a new 401(k) plan or IRA.
However, you likely will need to be holding a minimum balance of $7,000 in your existing 401(k) plan to keep it there or risk getting forced out. If your existing 401(k) balance is small, it’s worth looking into moving it over to a new employer’s plan or to an IRA right away.
“Leaving your money with your old employer allows you to maintain the investments you’ve already chosen and continue to benefit from the plan’s tax advantages,” noted Taylor Kovar, a CFP and founder at 11 Financial. “However, you won’t be able to contribute to the account anymore, and you’ll have to manage multiple retirement accounts if you change jobs frequently.”
If you don’t mind that you can’t contribute to this account any longer, you may want to leave the funds where they are.
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Transferring Money Into 401(k) Plan With New Employer
If you find a new job that offers a 401(k) plan, you can transfer the funds in your existing account to the new one without any taxes or penalties. You will still need to decide whether you like your new plan’s investment features and whether there are any transition rules you need to be aware of, but it is a common and easy option.
“This will consolidate your retirement savings into one account, making it easier to manage,” Carey said. “I recommend doing this if the new 401(k) plan has relatively low fees and a good selection of investments.”
Moving Money Into a Traditional or Roth IRA
Carey said he generally recommends people move their 401(k) into an IRA. These accounts have plenty of investment features and are yours to manage without an employer’s sponsorship. They might also have lower costs than what you were used to with your company-endorsed plan.
“Moving your funds into an IRA offers more control over investment choices and potentially lower fees compared to employer-sponsored plans,” Kovar said. “IRAs also provide a broader range of investment options, including stocks, bonds, mutual funds and ETFs.”
Moving your 401(k) into a tax-advantaged Roth or traditional IRA means you won’t need to pay taxes or penalties when you roll it over, and you won’t have to deal with 401(k) account maneuvers if you leave another job in the future. Additionally, you can consolidate multiple retirement accounts from different employer plans into one IRA for simplified management.
For Roth IRAs, withdrawals are tax free if you are over the age of 59½ and have had the account for five years or more. Of course, you’ll have to pay taxes on your existing 401(k) money when you convert them over (Roth IRAs are funded with after-tax dollars). There are no required minimum distributions (RMDs) with Roth accounts, but you’ll have to start them at 72 years of age if your money is invested in a traditional IRA, whether you are employed or not.
Cashing Out 401(k)
Finally, you can always decide not to roll over or reinvest your 401(k) when you move on from a job. However, you must be aware of the potential costs if you choose this option.
“This is almost always a bad idea, and I have never actually recommended it,” Carey said. “You shouldn’t do this unless absolutely necessary because it can result in penalties and taxes. If you withdraw money from a 401(k) before age 59½, you will face a 10% early withdrawal penalty in addition to income taxes on the amount withdrawn.”
Cash distributions will cost you in taxes and penalties and should be done only if you fully understand the potential outcomes and costs. Even if you avoid an early withdrawal penalty, your withdrawal will still be taxed. Withdrawing before the age of 59½ will probably result in 20% of the withdrawn amount being withheld.
Additionally, any cash you neglect to transfer over to a new plan or account within 60 days will be taxed as ordinary income. In short, you could be paying a lot of taxes and penalties by not taking the time to transfer over your 401(k) to a new employer-sponsored plan or enrolling it an IRA. If you can, simply leaving it in your old company plan might make more sense than you think.
David Nadelle contributed to the reporting for this article.
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