What Happens to Your 401(K) When You Leave Your Job?
by Katie Bruno, MIMFA
CERTIFIED FINANCIAL PLANNER™ Professional
A 401(k) is a type of employer retirement plan that lets you put money away to invest for retirement.
If you contribute to a 401(k) plan, your contributions come directly from your paycheck. Your employer may offer a match, meaning they also contribute to your account. But what happens to those funds when you change jobs?
Understanding Your 401(K) Options When You Leave a Job
No more paycheck means no more contributions from that employer, but the money you’ve invested in the account remains yours. Typically, the money can stay in your former employer’s plan if you have more than $5,000. Keep in mind that if your 401(k) has less than $5,000, your employer has the legal right to tell you they don’t want your money in their plan anymore. (Employers have a cost to maintain your account). In some cases, they may just mail you a check, which you should deposit into another retirement account right away, so as not to be penalized by the IRS.
Another thing to keep in mind when you leave a job is, if your employer contributed or offered a match, your money may not be fully-vested. If there was a policy about a specific amount of time you had to work for the company before you could earn their matching funds, you may owe back a portion of the funds that your employer contributed. However, you are always entitled to all the contributions you have made.
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If you are deciding what to do with your 401(k) funds, here are four options to consider:
(1) You may be able to leave money in a former employer’s plan, but review it carefully.
If your account has more than $5,000, you technically aren’t required to do anything and may be able to leave it alone. However, it’s a good idea to take a look at other investment options to make sure you aren’t limiting yourself. You will want to review the plan to ensure the account fees and investment fees are appropriate. For example, moving your old 401(k) into a new employer’s plan, or opening a new IRA to roll it into may offer you more beneficial investment choices.
(2) Roll the funds into a new retirement account.
Rolling over (or moving) your 401(K) funds to a new, individual retirement account is a good potential option, for a few reasons:
- First, having all of your investments in one place simplifies your financial picture, giving you fewer things to keep track of.
- Second, consolidating your accounts helps ensure that you and your financial advisor can more easily review your investment portfolio, making sure it’s appropriate for your goals and risk tolerance.
- Finally, rounding up all your “orphaned” 401(k) accounts from past jobs is a solid strategy that aids in your pre-retirement planning.
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(3) Move the funds to your new employer’s retirement plan.
If your new employer offers a 401(k), they may allow you to consolidate your old 401(k) with your new account. Again, check to ensure the fees and investment options are appropriate. In some cases, you may find you have better investing choices outside of an employer-based plan.
(4) Withdraw the money, but watch out for penalties.
You are allowed to take the money directly out of the account, however, there can be financial consequences to doing so. You will need to pay income tax on any money you withdraw, plus a 10% penalty for early withdrawal if you are under the age of 59 ½. It is best to speak with a financial planner and/or tax professional before withdrawing funds. You might be better off to consider other alternatives or rollover options.
Financial Advice for Your Life
If you aren’t sure what is best for you, seek personalized financial advice from a trusted professional. Most people do not have the time, resources or knowledge to understand all the complicated pieces on their own. Morey & Quinn Wealth Partners can offer investment advice and retirement plans that are tailored to your specific needs and goals.
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Your personal financial planner at Morey & Quinn helps guide your plan, even through periods of market volatility, and can help you adjust to changing needs whenever life brings the unexpected. Morey & Quinn financial planners provide access to many resources. We encourage personal conversations about how you see your life in retirement, and help establish financial foundations that aim you towards reaching your goals. Reach out today, and let us show you the value in a Well Planned Life.
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Any opinions are those of Katie Bruno, and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.