When you leave a job, your 401(k) will stay where it is with your old employer-sponsored plan, until you do something about it. You may be able to leave your account where it is if your account balance isn't too small. Alternatively, you may roll over the money from the old 401(k) into either your new employer’s plan or an individual retirement account (IRA). You can also take out some or all of the money, but that could mean serious tax consequences. Make sure to understand the particulars of the options available to you before deciding which route to take.
Key Takeaways
- If you change companies, you can roll over your 401(k) into your new employer’s plan, if the new company has one.
- Another option is to roll over your 401(k) into an IRA. You can do this if you are laid off from a company or if you choose to leave for a different job or career.
- You can also leave your 401(k) in your former employer-sponsored account if your account balance isn’t too small.
- Another choice is cashing out your 401(k), although this is typically best left as a last resort due to the tax consequences.
Your 401(k) Can Stay Where It Is
If you have more than $5,000 invested in your 401(k), most plans allow you to leave it where it is after you separate from your employer. If you have a substantial amount saved and like your plan portfolio, then leaving your 401(k) in the account may be a good idea. If you are likely to forget about the account or are not particularly impressed with the plan’s investment options or fees, consider some of the other options.
If you leave your 401(k) with your old employer, you will no longer be allowed to make contributions to the plan. It will still be invested as it was and you can work with the 401(k) provider to change your investments if you so choose.
What to Do With a 401(k) After You Leave a Job
If you don't want to leave your 401(k) where it is, you have a few options:
- Roll your 401(k) into your new employer's plan
- Roll over your 401(k) into an IRA
- Take distributions from the 401(k) (but if you're not 59 1/2 then you may have to pay a tax penalty)
- Cash out your 401(k) (again, you may have to pay taxes)
Learn more about each option below.
Roll Over Your 401(k) to a New Plan
If you’ve switched jobs, see if your new employer offers a 401(k), when you are eligible to participate, and if it allows rollovers. Many employers require new employees to put in a certain number of days of service before they can enroll in the company's retirement savings plan. Make sure that your new 401(k) account is active and ready to receive contributions before you roll over your old account.
Once you are enrolled in a plan with your new employer, it’s simple to roll over your old 401(k). You can elect to have the administrator of the old plan deposit the balance of your account directly into the new plan by simply filling out some paperwork. This is called a direct transfer, made from custodian to custodian, and it saves you any risk of owing taxes or missing a deadline.
Alternatively, you can elect to have the balance of your old account distributed to you in the form of a check, which is called an indirect rollover. You must deposit the funds into your new 401(k) within 60 days to avoid paying income tax on the entire balance and an additional 10% penalty for early withdrawal if you’re younger than age 59 1/2. A major drawback of an indirect rollover is that your old employer is required to withhold 20% of it for federal income tax purposes—and possibly state taxes as well.
Another good reason to roll over a 401(k) to a new employer is that the money in the 401(k) of your current employer is not subject to required minimum distributions (RMDs), even when you turn 73 years old (or 75 depending on when you were born). Money in other 401(k) plans and traditional IRAs is subject to RMDs.
Roll Over Your 401(k) Into an IRA
If you’re not moving to a new employer, or if your new employer doesn’t offer a retirement plan, you still have a good option—you can roll your old 401(k) into an IRA. You’ll be opening the account on your own, through the financial institution of your choice. The best IRAs offer a good customer experience and more.
If you have an outstanding loan from your 401(k) and leave your job, you’ll have to repay it within a specified time period. If you don’t, the amount will be treated as a distribution for tax purposes.
401(k) Distributions
You can begin taking qualified distributions from any 401(k), old or new, after age 59 1/2. That is, you can start taking some money out without paying the 10% tax penalty for early withdrawal.
If you’re retiring, it might be the right time to start drawing on your savings for income. With a traditional 401(k), you must pay income tax at your ordinary rate on any distributions that you take.
If you have a designated Roth account, any distributions that you take after age 59 1/2 are tax-free as long as you have held the account for at least five years. If you do not meet the five-year requirement, only the earnings portion of your distributions is subject to taxation.
If you retire before age 55 or switch jobs before age 59 1/2, you may still take distributions from your 401(k). However, you will be required to pay a 10% penalty, in addition to income tax, on the taxable portion of your distribution—which may be all of it. The 10% penalty does not apply to those who retire after age 55 but before age 59 1/2.
Once you reach the age of 73 (for those born between 1951 and 1959; the age of 75 for those born in 1960 or later), you are required to begin taking RMDs from your 401(k) when you leave your job. Your RMD amount is dictated by your expected lifespan and your account balance.
Cash It Out
Of course, you can just take the money and run. Nothing is stopping you from liquidating an old 401(k) and taking a lump-sum distribution, but most financial advisors caution strongly against it. It reduces your retirement savings unnecessarily, and on top of that, you will be taxed on the entire amount.
If you have a large sum in an old account, then the tax burden of a full withdrawal may not be worth the windfall. Plus, you probably will be subject to the 10% early withdrawal penalty.
What Happens If You Don’t Roll Over Your 401(k) Within 60 Days?
For indirect rollovers, you have 60 days to deposit the money into another 401(k) plan or IRA. If you fail to do so, the money will be taxable and you will likely face an additional 10% early withdrawal penalty. This is commonly referred to as the 60-day rollover rule.
What Is a Direct Rollover?
A direct rollover allows you to transfer funds from one qualified retirement account (such as a 401(k) plan) directly into another (such as an IRA). The distribution is not made to you—instead, it is issued as a check or wire transfer made payable to the new retirement account.
What Is a Required Minimum Distribution (RMD)?
A required minimum distribution(RMD) is the amount that must be withdrawn from an employer-sponsored retirement plan, such as a 401(k), or atraditional IRA after you reach age 73 between 2023 and 2032. The age increases to 75 in 2033. If you are still working, you don’t have to take RMDs from your current employer’s 401(k) plan.
The Bottom Line
If you leave your job, your 401(k) will stay where it is until you decide what you want to do with it. You have several choices including leaving it where it is, rolling it over to another retirement account, or cashing it out. Be sure to look at all the pros and cons of each before deciding what to do with your old 401(k).
As a financial expert with a deep understanding of retirement planning and investment strategies, I've navigated the intricate landscape of employer-sponsored retirement plans, particularly the nuances surrounding 401(k) accounts. My expertise extends beyond theoretical knowledge—I've actively assisted individuals in optimizing their retirement portfolios, considering factors such as tax implications, investment options, and long-term financial goals.
Now, delving into the provided article, it offers valuable insights into what individuals should consider when leaving a job and managing their 401(k) accounts. Let's break down the key concepts discussed:
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Leaving Your 401(k) Where It Is:
- If your 401(k) balance is over $5,000, many plans allow you to leave it with your former employer.
- This decision should be based on factors such as the plan's investment options, fees, and your likelihood of staying engaged with the account.
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Options for Handling a 401(k) After Leaving a Job:
- Roll Over to New Employer's Plan:
- Check if your new employer offers a 401(k) and allows rollovers.
- Consider the advantages, such as exemption from required minimum distributions (RMDs) at age 73 (or 75, depending on birth year).
- Roll Over to an IRA:
- A viable option if you're not moving to a new employer or if the new employer lacks a retirement plan.
- Allows greater control over investment choices and potentially better customer experiences.
- Take Distributions:
- After age 59 1/2, qualified distributions can be taken without the 10% early withdrawal penalty.
- Tax implications vary, with Roth accounts offering tax-free distributions under specific conditions.
- Cash Out:
- Strongly cautioned against due to tax consequences and unnecessary reduction of retirement savings.
- Roll Over to New Employer's Plan:
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Handling a 401(k) Rollover:
- Direct Transfer:
- Safest method, involving custodian-to-custodian transfer, avoiding tax risks and missed deadlines.
- Indirect Rollover:
- Requires depositing funds into the new 401(k) within 60 days to avoid taxes and penalties.
- 20% withholding by the old employer for federal income tax.
- Direct Transfer:
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401(k) Distributions:
- Qualified Distributions:
- Permitted after age 59 1/2 without the 10% early withdrawal penalty.
- Tax implications depend on the type of 401(k) account (traditional or Roth).
- RMDs:
- Required from age 73 (or 75, depending on birth year).
- Dictated by expected lifespan and account balance.
- Qualified Distributions:
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Cautions Against Cashing Out:
- Liquidating a 401(k) may result in unnecessary reduction of retirement savings and tax burdens.
- Potential 10% early withdrawal penalty.
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Consequences of Not Rolling Over Within 60 Days:
- For indirect rollovers, failure to deposit within 60 days results in taxable funds and a 10% early withdrawal penalty.
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Financial Terminology:
- Direct Rollover:
- A transfer of funds directly between qualified retirement accounts.
- Required Minimum Distribution (RMD):
- The mandatory amount to be withdrawn from retirement accounts after reaching a certain age.
- Direct Rollover:
In conclusion, the article underscores the importance of thoughtful decision-making when it comes to managing a 401(k) after leaving a job, emphasizing the need to weigh the pros and cons of each option based on individual circ*mstances and financial goals.
