Money on the Table: What to Do with Your 401(k) When You Change Jobs

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Saving for retirement is probably the last thing on your mind when starting a new job. After all, you’re just beginning your career at this company, and retirement is still years away. Yet you wouldn’t dream of leaving your old job without your last paycheck, so why leave money on the table with your 401(k)?

There’s a lot to consider when changing jobs, including what to do with your employer-sponsored investment accounts. Luckily, you won’t have to decide on the spot when you hand in your I.D. badge. In most cases, you have at least 30 days after leaving your job to choose one of the following options:

·      Leave your 401(k) with your current employer. Most companies will allow you to keep your retirement account where it is as long as you meet a minimum balance (typically $5,000). One caveat is that you will no longer be able to contribute to this plan, which will exist separate from any retirement products offered by your new job. However, it may be worth the hassle of managing multiple accounts if you like the options offered by your current employer. This is also a useful alternative if you do not qualify for a 401(k) with the new organization.

·      Rollover your 401(k) to your new employer. The main restriction for this type of transfer is whether your new employer’s 401(k) plan accepts rollovers. Not all retirement plans are equal. Before you initiate the rollover process, compare the 401(k) plans offered by both employers, taking note of expense ratios, overall fees, and types of investments allowed.

·      Rollover your 401(k) into an IRA. For most people, rolling a 401(k) into an individual retirement account (IRA) will be their best bet. That’s because IRAs offer nearly unlimited investment options and typically charge lower fees than 401(k) plans. Like your 401(k), IRAs can be structured in one of two ways: 

o   Traditional IRAs will seamlessly welcome your former employer’s 401(k) assets. Once the rollover is complete, you will be able to continue making deferred tax contributions. However, any withdrawals made will be taxed as ordinary income.

o   Roth IRAs do not offer a tax break upfront, so you will be taxed immediately on the amount rolled out of your 401(k), as well as any future contributions made into the account. However, you will not be taxed on withdrawals made after the age of 59 ½.  

·      Cash out. If your former employer matched your 401(k) contributions, it may be tempting to take the cash out as a bonus. However, this is almost always your worst option. Not only will you be taxed right away on the amount withdrawn, Uncle Sam will also charge you a 10% “early withdrawal fee” if you are under the age of 59 ½. You may be exempt from this penalty if you lose or leave a job at age 55 or later. Carefully consider whether this option is worth sacrificing a significant amount of the account’s value, and potentially sabotaging your retirement plans.

If you are facing a job change, here are a few other things to consider:

·      Vesting Schedule. You may not own all the assets in your retirement account. That’s because many employer-sponsored retirement plans follow a vesting schedule. They are typically designed so employees must stay with the company for an extended period to realize the full value of employer contributions. Take time to investigate your company’s vesting schedule. You may find that you are just a few days or weeks from the next vesting cliff. In that case, it could be worth trying to hold onto your position a little longer.

·      Direct vs. Indirect Rollover. If you decide to rollover your 401(k), either into an IRA or your new employer’s plan, there are two options available. A direct rollover is the cleanest. At your request, the administrator of your current 401(k) sends a check directly to your new account.

With an indirect rollover, the administrator for your 401(k) sends you the check. You will then have 60 days to send it to the administrator of your new retirement account, or risk incurring taxes and/or a penalty. With an indirect rollover, make sure the check is made out to the new plan’s administrator, not you. Otherwise, you may be exposed to further tax complications.

While rare, there may also be a fee to rollover your account. However, it is typically less than $100—a small price if it allows you to make the best choice for your retirement.  

Shuffling retirement plans may not be the most fun part of changing jobs, but can have a significant impact on your golden years. That’s why it’s important to choose carefully for your situation. The good news is that unless your 401(k) needs to be closed right away (e.g. because it doesn’t meet minimum balance requirements) you have a window of time after leaving your old job to make that decision.