How To Decide What To Do With Your 401(k) After You Change Jobs

You can move it to a new employer's plan or roll it over into an IRA

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When you end employment with a company, it's important to decide what to do with your employer-sponsored retirement plan. Unless you agree to let your former employer continue managing your funds, you'll need to decide where you will put your money within 60 days of leaving, or the funds in the plan may automatically be distributed to you or moved to another retirement account.

No matter why you're leaving the company, 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.

Key Takeaways

  • When you leave an employer, you have several options for what to do with your 401(k).
  • If you leave the money where it is or move it into another 401(k) or a rollover IRA, you won't face any penalties or taxes.
  • A direct distribution before age 59 1/2, however, will bring a 10% penalty, and you will have to pay income taxes on the money.
  • If you have less than $1,000 in the account, your employer could cut you a direct check without notifying you.

Leave the Money Where It Is

If allowed, 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.

You might choose to leave your retirement money with a previous employer, simply because you're familiar with the investment options, or they have 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 plans. There are no tax consequences or penalties with this move, and your employer should offer instructions to walk you through it.

If you choose to withdraw a lump sum from the old plan, then deposit it to the new plan instead of a direct transfer, your employer may withhold 20% of the sum for taxes. Be sure to report this amount on your taxes for the year the distribution was made.

This rollover option 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.

Rollover the Money Into an IRA

You could also move the money into a rollover IRA and choose your 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 may want to consider combining your retirement accounts instead.

When you do a direct rollover, there are no tax consequences or tax penalties involved. Rollover IRAs offer endless investment options to choose from—including stocks, bonds, mutual funds, ETFs, and even real estate—if that's what you choose.

On the downside, you will no longer be making automatic contributions to this account, so you will lose your savings momentum. However, rollover IRAs are quite flexible. You may be able to roll the assets into a future employer’s plan.

Spend the Money

You could take the money and spend it. This lump fund delivery is called a lump-sum distribution, and it’s a costly option for many reasons.

For one thing, you will pay income taxes on it, and if you are younger than 59 1/2, you will likely pay an additional 10% penalty. Factor in your tax bracket and potential state and local taxes, and you could lose a big chunk of those savings. You also lose the savings momentum you had in the retirement plan—and the time spent growing the money.

Employer Distribution

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.

The Balance does not provide tax, investment, or financial services or 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.

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