Last Updated: March 7, 2024

So, you’ve left your job…now what?

A white paper from Capitalize, a 401(k) rollover fintech company, found that American employees have “forgotten” about or left behind an estimated 29.2 million 401(k) accounts and $1.65 trillion in assets at old jobs. It’s important to decide what to do with your 401(k) when you leave any job. What options do you have for your existing 401(k) when transitioning to a new job?

What You Can Do With Your 401(k) When You Leave a Job

1. Keep your existing plan

Should you leave your 401(k) in your previous employer’s plan?

Most employers will allow you to remain in their 401(k), even after you leave the company. Your money continues to grow tax-deferred, as it would in other traditional 401(k)s. Some risks exist with this strategy, though. You’ll likely have several—if not many—jobs throughout your career and keeping your 401(k)s with old employers may make it more likely that you lose track of the accounts. Additionally, you may not tend to them as much as you would one with your current employer, so your asset allocation and/or fund selection may not align with your financial and retirement goals and risk tolerance. According to the National Longitudinal Survey by the U.S. Bureau of Labor Statistics, younger Baby Boomers held an average of 12.4 jobs between the ages of 18–54. Imagine if you have that many jobs in your career and have to manage twelve 401(k)s from different employers… sounds overwhelming.

If you have a significant amount saved in your account and prefer the plan options offered by your previous employer, you may wish to keep your account where it is. Also, according to Ameriprise, if you have your previous employer’s publicly traded stock in your 401(k), “and that stock has grown significantly in value, the tax breaks you received from the in-kind distributions of the stock will be lost if you take the option to roll over your account into your new employer’s 401(k) plan or into an IRA.” If possible, understand your employer’s vesting schedule when considering leaving your job to understand how much of your matched funds you’ll be able to take with you.

One caveat: If you have less than $1,000 in your 401(k), you may not have these options and be required to cash it out. If you have between $1,000–5,000, you may be required to move that money out, perhaps by rolling the funds into an IRA.

2. Roll your existing 401(k) to your new employer’s plan

Should you roll over your 401(k) to your new employer’s plan?

If your new employer offers a 401(k) plan, you can roll your previous account funds into your new plan. Consolidating into one plan still allows your funds to grow tax-deferred (for traditional 401(k)s) but allows you to capitalize on the investment options offered by your new employer. Rolling over into your new employer’s 401(k) may be especially advantageous if your new plan has lower fees or better investment options that align with your financial goals.

Make sure your new 401(k) account is set up with your new employer before you start the rollover process. Doing a direct transfer, meaning the money goes from one 401(k) custodian to the new custodian while the money never touches your hands, is a good idea to avoid any potential taxable events or missed deadlines.

Indirect rollovers involve your old 401(k) custodian cutting you a check, which you then deposit into your new custodian’s plan. You must do this within 60 days to avoid paying income tax and a 10% early withdrawal penalty. Your previous employer is required to withhold 20% for federal income taxes and may be required to withhold more for state income taxes with indirect withdrawals—though you will receive those withheld funds back when you file your taxes if the funds were deposited in the required timeframe. You’ll be required to deposit the full amount, including the withheld 20%, in your new account within 60 days, so you’ll have to pull the money from another source to make up that 20%. But why make extra work and trouble for yourself?

3. Roll your 401(k) into an IRA

Should you roll your 401(k) into a traditional or Roth IRA?

If you don’t have a new employer or the company does not offer a retirement plan, rolling your 401(k) over into an IRA can be a good option. Banks or brokerage firms can help you set up a traditional IRA into which you can roll your 401(k) assets. As a bonus, you can roll your 401(k) into the same IRA every time you leave a job if you wish, keeping your assets consolidated. Traditional IRAs allow your money to grow tax-deferred (like a traditional 401(k)), and you’ll pay taxes on your distributions in retirement.

Remember that Roth IRAs have a different structure than traditional IRAs, as they only permit after-tax contributions. This means your account grows tax-free (vs. tax-deferred), and your distributions (including account growth, not just your principal) are not taxed. Your 401(k) may allow for an after-tax Roth contribution; your benefits provider can help you figure out if this is an option for you. If you were making contributions to a Roth 401(k), you can roll your money into a Roth IRA—which is not an employer-sponsored retirement plan.

Another option is doing a Roth conversion with your 401(k) by rolling your existing 401(k) into a Roth IRA. You’ll pay taxes on the full amount you convert—this is because 401(k)s have never been taxed and Roth IRAs are funded with after-tax dollars and grow tax-free, so you can make withdrawals in retirement without paying taxes.

IRAs generally have broader investment options, putting you in your retirement plan’s driver’s seat vs. an inactive participant in your employer’s 401(k). As discussed previously, IRAs have different tax implications, so be sure to do your due diligence and speak with a financial professional before selecting this option.

4. Cash out your 401(k)

Should you cash out your 401(k) when changing jobs?

As previously mentioned, if you have less than $1,000 in your 401(k), you may have no choice but to cash it out when separating from your employer.

In contrast, you can elect to cash out your 401(k), no matter the value. This is generally highly inadvisable for a variety of reasons and should be considered as a last resort if you have an urgent need for this money. For one, you’ll set yourself back in your retirement planning and saving—and this can be very difficult to recover from, as the earlier you start saving, the more time horizon you have for compounding interest to work its magic. Also, cashing out your 401(k) creates a taxable event, meaning you’ll pay ordinary federal and state (if applicable) income taxes on the distribution. You’ll also pay a 10% penalty to the IRS for the early withdrawal if you are younger than 59½. You may be able to avoid this early withdrawal penalty if you’ve separated from your employer in or after the year you turn 55, but this does not apply to any assets you’re holding in an IRA.

If you absolutely need to withdraw the money, you can avoid the income taxes and early withdrawal penalty if you deposit the funds in full back into the IRA within 60 days of the withdrawal.

One item of note we haven’t covered: What do you do if you have a 401(k) loan out when leaving your employer?  It can sound overwhelming to have to pay back a loan quickly, but it’s likely that’s what you’ll be required to do. You’ll need to repay the balance in full relatively soon after leaving your employer or your loan will be considered a distribution and subject to taxes—and you may have to pay the 10% early withdrawal penalty depending on your age. Some plans allow ex-employees to continue to pay on loans, even after separating from the sponsoring company’s employment. Check your plan’s policy with regards to 401(k) loans to determine the best course of action.

As you can see, you have several attractive options for managing your 401(k) when you leave a job with different pros and cons. Just keep track of all your retirement accounts to avoid losing track of an account and leaving money behind in an old employer’s retirement plan. With any and all retirement accounts you own, make sure to track your account regularly, review your account statements, investments, and fund selection as part of your overall portfolio review, and keep your beneficiaries up to date.

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This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated.  The information contained within is believed to be from reliable sources.  However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals. Past performance is no guarantee of future results, and any expected returns or hypothetical projections may not reflect actual future performance or outcomes. All investments involve risk and may lose money. Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must evaluate and investigate any investments considered or any investment strategies or recommendations described herein (including the risks and merits thereof), seek professional advice for their particular circumstances, and inform themselves about the tax or other consequences of any investments or services considered.  Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser.  For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov  or contact us directly at 411 30^th Street, 2^nd Floor, Oakland, CA  94609, T: 510-658-1880, F: 510-658-1886,  www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.

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References

Ameriprise. (n.d.) What should you do with your 401(k) when you change jobs? https://www.ameriprise.com/financial-goals-priorities/retirement/what-to-do-with-your-401k-plan-when-you-change-jobs

Boyte-White, Claire. (January 25, 2022). What Happens to a 401(k) After You Leave a Job? Investopedia. https://www.investopedia.com/articles/personal-finance/112315/what-happens-401k-after-you-leave-your-job.asp

Brandon, Emily. (July 19, 2021). What Happens to Your 401(k) When You Leave Your Job. U.S. News. https://money.usnews.com/money/retirement/401ks/articles/what-happens-to-your-401-k-when-you-leave-your-job

Capitalize. (October 18, 2021). The True Cost of Forgotten 401(k) Accounts. https://www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks/#:~:text=Leaving%20behind%20a%20forgotten%20401,retirement%20savings%20growth%20each%20year.

O’Brien, Sarah. (September 1, 2021). If you’re quitting your job as part of the ‘Great Resignation,’ here’s what you need to know about your 401(k). CNBC. https://www.cnbc.com/2021/09/01/if-youre-part-of-the-great-resignation-here-are-some-401k-tips.html

Stratman, Matthew. (July 6, 2020). 401(k) Options After You’ve Left Your Job. Kiplinger. https://www.kiplinger.com/retirement/retirement-plans/401ks/601017/401k-options-after-youve-left-your-job

U.S. Bureau of Statistics. (November 30, 2021). National Longitudinal Surveys. https://www.bls.gov/nls/questions-and-answers.htm#:~:text=Number%20of%20Jobs%20Held%20in%20a%20Lifetime,-A%20BLS%20news&text=(In%20this%20report%2C%20a%20job,jobs%20held%2C%20see%20the%20table.