What to Do with Your 401(k) When Switching Jobs

Your retirement savings is probably the last thing on your mind when you change jobs. After all, you’re just starting out at a new company: so there is so much to familiarize yourself with to ease and expedite the transition. Plus, retirement is still perhaps years away.

Luckily, you won’t need to decide on the spot what to do with your 401(k) when you hand in your I.D. badge. That’s because, in most cases, you generally have about 30 days after leaving your job to choose your course of action. However, a month does fly by quickly, so make sure you don’t leave money on the table by keeping your 401(k) in limbo. Here are four options to help nudge you into making a decision.

Leave your savings with your current employer

Most companies will allow you to maintain your current retirement account provided you meet a minimum account balance (as of now, typically $5,000). However, you can no longer contribute to this retirement plan and it will exist separately from any others offered by your new job as one more account to manage. With that said, it’s sometimes worth managing multiple accounts if your current employer offers better plan options than your new one.

Roll over your savings into your new employer’s 401(k) plan

Provided you're satisfied with investment options, costs, and features offered by your new employer-sponsored plan, rolling over your savings into their plan sometimes makes the most sense.

One benefit of going this route is the ability to consolidate plans: meaning one less account to manage.

The main restriction for this type of transfer is whether or not your new employer’s 401(k) plan accepts rollovers. Check with your benefits department to see if they allow this.

Roll over your savings into an IRA

Many people choose to roll over their 401(k) into an individual retirement account (IRA). The reason? IRAs offer nearly unlimited investment choices compared to more restricted options associated with an employer-sponsored 401(k).

Therefore, an IRA will allow you to invest your savings however you want: whether that’s in real estate, stocks, bonds, mutual funds, or ETFs. You can even decide to roll over into a Roth or traditional IRA. Just note tax implications may arise, depending on your own unique situation.

Plus, if you plan on changing jobs at least a few times over the remainder of your career, an IRA can serve as a single destination for the entire breadth of your older retirement savings plans.

Should you choose to roll over your 401(k) into an IRA, you’ll first need to understand the transfer process. Contact your plan administrator so he or she can explain this to you and allow for either a direct or indirect rollover—knowing it’s important to understand the differences!

A direct rollover is the simplest and oft-recommended way to move retirement money. With this option, a 401(k) plan administrator sends funds directly to your new IRA account without you ever needing to touch the money.

With an indirect rollover—also known as a “60-day rollover”—you take actual custody of the funds as a check is provided for you to deposit. In this scenario, you can use the funds for any purpose for 60 days. However, you’ll need to eventually redeposit them into a new IRA by the end of the 60-day period to avoid paying income tax and a 10% early withdrawal penalty (assuming you are under the age of 59½). This is precisely why indirect rollovers are usually only recommended if you need to urgently use the money and can execute this transaction within the 60-day window in the absence of risk.

Cash out your savings

It’s perhaps tempting to take the cash-out as a bonus (called a “lump-sum distribution”). However, this is almost always your worst option as you'll owe income tax on the amount withdrawn. Uncle Sam will also charge you a 10% “early withdrawal fee” if you are under the age of 59½. What's more, you'll lose out on the time your savings could have grown.

Under specific circumstances, you may be exempt from this early withdrawal penalty: for example, if you lose or leave a job in or after the year you turn 55. Carefully consider whether this option is worth sacrificing a significant amount of the account’s value and potentially sabotaging your retirement plans.

Other 401(k) considerations when changing jobs

Vesting schedule: You may not be entitled to all monies in your retirement account, as many employer-sponsored retirement plans follow a vesting schedule. These are typically designed so that employees remain with a company for an extended period to realize the full value of employer-matching contributions.

Take time to investigate your company’s vesting schedule; you may in fact find you are only a few days or weeks away from the next vesting cliff. In this case, and if possible, it’s perhaps worth staying a little longer.

401(k) loans: If you borrowed money from your 401(k) and are leaving your company, your plan may expect immediate repayment (often within 60 days). However, know that you also have the option of rolling over the balance into an IRA (or other eligible plan) and repaying your loan into this account. In this scenario, you’ll have until the federal tax deadline of the following year to repay the loan. That means if you left your job in January 2023, you’ll generally have until April of 2024 to fully pay back the loan. If you can’t repay the loan in full, the unpaid balance is treated as a withdrawal and therefore treated as taxable income. What’s more, you’ll pay a 10% penalty if you’re younger than 59½.

The bottom line on 401(k) matters when changing jobs

Shuffling retirement plans is perhaps not the most glamorous aspect of changing jobs, but the process can significantly impact your golden years. That’s why it’s important to carefully consider your own individual situation and act accordingly. For most people, speaking to a financial advisor can help give you the clarity and guidance you need to feel confident in whichever decision you ultimately make.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to you needs, such advice services must be obtained on your own separate from this educational material.