How to Decide What to Do With Your 401(k) After You Change Jobs
You can move it to your new employer plan or roll it over into an IRA
If you are not sure what is happening with your employer-sponsored retirement plan when you leave a company, you need to find out. Unless your former employer will continue managing your funds, you need to make a decision about where you will put your money within 60 days or the funds in the plan will automatically be distributed to you or another retirement account.
Whether you are leaving the job due to a company move, layoff, firing, or lifestyle change, the company should be very clear about whether you can keep your money where it currently is. You then have to decide what to do next.
Leave the Money Where It Is
You could keep the money in your former employer's plan. Some employers will allow that if you have a certain balance, generally $5,000 or more.
There are some legitimate reasons for leaving your retirement money with a previous employer, including familiarity with investment options and lower fees.
Move the Money to Your New Plan
You could move the money directly into your new employer's retirement plan. Many employers will offer the option of a plan-to-plan rollover into their 401(k) or other qualified retirement plan. There are no tax consequences or penalties with this move, and your employer should offer instructions to walk you through it.
This can be a very easy option that keeps your savings momentum, as long as you like the investment choices in the new plan. It's also nice to start a new 401(k) with an already healthy balance.
Roll Over the Money Into an IRA
You could also move the money into a rollover IRA and choose your own investments. If you tend to move from job to job as you climb the career ladder, a rollover IRA is a great option because it can become the single location for the money from your old 401(k)s and retirement plans.
If you left behind a plan at every job, you could wind up with a 401(k) graveyard filled with neglected investments by the end of your career. You don't want that.
When you do a direct rollover, there are no tax consequences or tax penalties involved. And rollover IRAs offer endless investment options to choose from—including stocks, bonds, mutual funds, ETFs, and even real estate—if that's what you are looking for.
On the downside, you will no longer be making regular contributions to this account, so you will lose your savings momentum. However, rollover IRAs are so flexible, you may be able to roll the assets back into a future employer’s plan.
Spend the Money
You could take the money and spend it. This is called a lump-sum distribution, and it’s a bad option for many reasons.
For one thing, you will pay income taxes on it, and if you are younger than 59 ½, you will likely pay an additional 10 percent penalty. Factor in your tax bracket and potential state and local taxes, and you could lose half of those savings. You also lose the savings momentum you had in the retirement plan—and the time spent growing the money.
According to the Internal Revenue Service, if your savings balance is less than $5,000, your employer does not need your consent before distributing the funds from the plan. However, if there is more than $1,000 in your plan and you don’t opt for another type of distribution, your plan administrator is required to move the funds into an IRA.
If your 401(k) balance is less than $1,000, your employer could give you a lump-sum distribution without your requesting it. If you do get such an unintended distribution but are still within 60 days of terminating your old plan, you should act quickly to roll the money over into a new employer's plan or a rollover IRA.
You should be able to claim on your tax return any taxes or penalties your former employer initiated when it made the distribution. It makes sense to discuss this situation with a tax professional before you file.
Jacara does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.