Leaving Your Job? Here’s Your Best Move for That 401(k)

Around one in five Americans has a dormant or forgotten 401(k) plan that they left behind when they left their job, and estimates suggest more than a trillion dollars in forgotten assets are in these accounts.  That’s a lot of money for people to miss out on but it’s understandable,  as many people job-hop regularly throughout their working life.

If you are leaving your job, you’ll want to make sure you’re proactive about the money in your 401(k) so you don’t end up losing the cash you worked hard to invest. You have a few options for what to do with the funds, each of which has pros and cons. Here are the possible solutions you could pursue, along with tips on which is right for you.

1. Leave your money invested in your current plan

The easiest option when leaving your job is to just let your 401(k) account stay where it is. You can keep the money invested with your current employer in most situations. If you do, you won’t have to sell any investments or worry about moving the funds anywhere. The upside to this approach is its simplicity.

There are also plenty of downsides though:

• You could end up with a string of old 401(k) accounts from each of your past jobs — some of which may be forgotten
• It will be harder to manage your asset allocation if you have a bunch of money spread across different 401(k) accounts
• You’re stuck investing in whatever investments are available in the current 401(k) — which may be a bad thing if those investments tend to charge high fees

Ultimately, this approach probably isn’t the best one for most people because the benefits are limited to the fact it’s easy, and the many disadvantages outweigh that consideration. 

2. Withdrawing the money

You also could withdraw the money. You should absolutely not do this, though. You will be taxed on the withdrawn funds at your ordinary income tax rate and owe a 10% penalty if you are under 59 1/2 at the time when you leave. You also jeopardize your retirement security by taking money out now that is supposed to support you later. 

Do not withdraw your 401(k) balance when you leave work, or you will regret it. 

3. Rolling your 401(k) over into your new workplace plan

If your new company that you go to work for offers a 401(k), you can roll your existing 401(k) account into it. This would mean you’d hold your entire 401(k) balance with your new employer. You’ll typically need to sell the investments in your current 401(k) to move the money into the new account, though. You’re also going to be stuck with whatever investments your new 401(k) offers, which again could be very limited.

The upside of this approach, though, is that you keep all your retirement funds together in one account at the new employer’s which could mean it’s easier to manage your asset allocation. You also won’t forget any 401(k)s if you keep rolling your money over to your new company account each time you change jobs. 

4. Moving the money into an IRA

You have the option to move your money to another account as well: an IRA.

You can open a traditional IRA at any brokerage firm, and it comes with the same tax breaks as a 401(k). You may be able to arrange to directly roll over your money into an IRA  or can request an indirect rollover which means your current 401(k) is liquidated, you receive a check, and you have 60 days to deposit the money into your IRA account to avoid having it treated as an early withdrawal. 

There are some big benefits of moving your 401(k) money into an IRA instead of rolling it into a new 401(k). For one thing, you can do this if your new company does not offer a 401(k). Even if a workplace plan is available, though, IRAs can be a better choice in some circumstances. 

IRAs provide a lot more flexibility in what you can invest in. You can put your money into individual stocks, for example, and you should have a wider choice of mutual funds or ETFs than the typical 401(k) makes available. In fact, most brokerage firms allow you access to virtually all publicly traded stocks and funds within your IRA. You can even open up specialized IRAs to invest in alternative assets like cryptocurrency or precious metals. 

When you open an IRA, it is also yours to keep. If you decide to leave your next job, you don’t move to move the money again. In fact, each time you leave a position, you can move the money from the 401(k) from that job into the same IRA so you have one big account. That makes managing asset allocation considerably easier. 

Which option is best for you?

For many people, an IRA rollover is the best choice for managing a 401(k) when you quit your job. That’s because of the broader pool of investment options and the fact you can maintain your account with a brokerage firm of your choosing. However, if you do plan to contribute to your new workplace plan and want to keep all your retirement money in one account, then rolling the old 401(k) funds into your new 401(k) may be a better choice.

The only really bad options are leaving the money invested in your old 401(k) and forgetting about it, or withdrawing the funds and getting hit with a penalty plus losing the chance for the money to support you as a retiree. As long as you don’t do either of those two things, the money will end up helping you retire in the end regardless of whether you moved it to a 401(k) or an IRA as your job came to an end.