WHAT HAPPENS WITH YOUR 401(K) WHEN YOU LEAVE A JOB?

4 June 4 MINS READ
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You'll have a lot to finish up before your last day of work if you decide to leave your job. One important thing is deciding what to do with your 401(k) plan. While your HR might be nice enough to offer some help, it is always up to you to decide what to do with your retirement fund when you change employers.

Good thing you have some options depending on what you do once you quit your job. In this article, we'll go through four options for what to do with your 401(k) when you leave a job.

READ STRATEGIES TO MAXIMIZE YOUR EMPLOYER 401(k) MATCH

401(k) PLAN OPTIONS WHEN YOU LEAVE A JOB

1. Leave The Account Where It Is

This might just be the most viable option for you. It allows you to keep investing the money even if that company no longer employs you. If you have more than $5,000 in your 401(k) retirement savings plan, most old employers will let you leave your investment. If your account balance is less than this, your former employer may choose to cash out your plan and send you a check for the balance.

This approach has the advantage of allowing you to keep your 401(k) with your old company if they provide favorable terms. It also gives you time to wait till registration is open with your new employer.

There could be drawbacks though. When you leave your 401(k) savings with your old employer, you may have limited access to your funds. Some employers can charge exorbitant maintenance fees, limit investing options, and restrict you from accessing your money until you reach retirement age. Avoid leaving your 401(k) with your old company unless you're about to retire and know you won't be changing jobs frequently.

2. Move The Funds To Your New Employer Plan

If you've changed employment, find out if your new company has a 401(k), when you'll be eligible to participate, and if rollovers are allowed. Many employers will require you to work a particular number of days before you are allowed to join a retirement savings plan. Before you roll over your previous 401(k), be sure your new 401(k) account is operational and ready to receive contributions.

It's straightforward to roll over your former 401(k) plan once you've registered in a plan with your new company. By simply completing some paperwork, you can have the administrator of the previous plan deposit the balance of your account immediately into the new plan. This is known as a direct transfer, and it prevents you from owing taxes or missing a deadline.

You can also choose to have the amount of your previous account transferred to your new account in the form of a check, which is known as an indirect rollover. If you're under the age of 59, you must deposit the funds into your new 401(k) within 60 days to avoid paying income tax on the entire balance and a 10% penalty for early withdrawal. An indirect rollover has the disadvantage of your old company being obliged to withhold 20% of your pay for federal income tax purposes—and possibly state taxes as well.

3. Roll The Plan To An IRA

If you can't find a new job and your savings are less than $5,000, you should consider transferring your funds to an individual retirement account (IRA). If your new job doesn't offer a retirement plan or the terms aren't what you want, this is also a good choice. IRAs, unlike 401(k) plans, offer a wide range of investment alternatives, including ETFs, bonds, stocks, and mutual funds.

An IRA is tax-deferred, which means you won't have to pay taxes until you're 59 years old. You'll be subject to mandated minimum distributions once you reach the age of 70. You'll have to pay a 10% penalty if you make any withdrawals before you reach the age of 59. You can also choose a Roth IRA, which allows you to take tax-free distributions. In an IRA, you can invest in low-cost investment funds and save thousands of dollars over time. After you've moved your funds, you're on your own with your IRA account.

4. Cash Out The Money

You have the option of cashing out your 401(k) rather than leaving it with your former company or rolling it over to a new plan. When you cash out, your employer will give you a cheque or a bank transfer for the entire balance. However, cashing out carries penalties and a 20% tax rate, which is significantly more than the average rate. You'll also miss out on the future gain that money would have earned if it had been invested until retirement. Our advice? Avoid it.

BOTTOM LINE

You have various alternatives for dealing with your 401(k) if you leave your job. There is no one-size-fits-all 401(k) strategy for everyone, but by weighing your alternatives, you can figure out what's best for you. Before moving your money, look for fantastic fund options with cheap investing fees. If you do decide to transfer funds from one plan to another, follow the transfer rules to avoid missing a deadline or triggering an unanticipated taxable distribution.

Plan for life after retirement with these retirement options.