401(k)

For many people approaching retirement or starting a new job, a common question arises: “What happens to your 401(k) when you leave a job?” After years of diligently contributing to your retirement savings, it’s natural to feel unsure about the best way to manage those funds. You have several options, each with pros and cons depending on your circumstances and financial goals.

In this guide, we’ll walk you through each choice, helping you understand the implications so you can make a decision that secures your financial future.

Options for Managing Your 401(k) When Leaving a Job

As you navigate career changes, one of the biggest questions is what happens to your 401(k) when you leave a job. You’ve been diligently saving for retirement, watching that account balance grow. Now what?

Well, you’ve got four main options to consider. You can leave your plan with your previous employer, roll it over into an individual retirement account (IRA), transfer it to your new employer’s plan, or take the cash.

Leave Your 401(k) with Your Old Employer

When you leave a job, it’s easy to leave your 401(k) where it is. This takes no effort and seems appealing if your plan has grown. But, there are some trade-offs to consider.

You’ll likely have limited investment options compared to other choices like an IRA. This can make it harder to diversify your portfolio and tailor it to your risk tolerance and goals. 401(k) plans often have higher fees than IRAs, potentially reducing your overall savings over time.

Before You Decide

Carefully evaluate your old plan’s performance and fees. Ensure your investments align with your current risk tolerance and retirement goals. If you’re unsure, discuss possible changes with the plan sponsor or a financial advisor. Remember, convenience isn’t the only factor in making the best choice for your financial future.

Roll Your 401(k) into Your New Employer’s Plan

If you’ve landed a new job, you might consider rolling your old 401(k) into your new employer’s retirement plan. This could give you access to employer-matching contributions, helping your money grow faster for retirement.

However, this convenience comes with trade-offs. Your new plan might offer fewer investment choices than an IRA. This could limit your ability to diversify and personalize your portfolio. Remember, employer matching usually applies only to new contributions, not the rollover amount.

Loan and withdrawal policies also vary. Some plans won’t let you borrow or withdraw money while employed. If you might need access before retirement, consider this carefully.

Evaluate Your Options

Before you decide, review your new plan’s investment choices, fees, and rules about loans and withdrawals. Compare this information to your old 401(k) and an IRA to make the best choice for your long-term financial goals. Don’t rush into a decision. Take your time to understand all your options before choosing what’s right for you.

Think Twice Before Cashing Out Your 401(k)

Cashing out your 401(k) when you leave a job might seem tempting, but it’s rarely a good idea. While you get immediate access to your money, the downsides can seriously hurt your financial future.

The Tax Bite

First, you’ll face income taxes on the entire amount. This can bump you into a higher tax bracket, leaving you with less than you expected. If you’re younger than 59 ½, you’ll also owe an early withdrawal penalty, shrinking your payout even further.

Lost Opportunity

Beyond taxes, cashing out means missing out on years of potential investment growth. This can reduce your retirement savings, making it harder to afford your lifestyle later. The money you take now could have grown much larger over time.

A Last Resort

Cashing out your 401(k) should only be considered in extreme emergencies. Before deciding, explore all other options and talk to a financial advisor. They can help you understand the consequences and find choices that better support your retirement goals. Remember, your future self will be grateful for your wise financial choices today.

Try These Additional Strategies for Your Old 401(k)

Besides the four main options, there are a few more things to consider when managing your 401(k) after leaving a job.

Streamline Your Savings with an IRA Rollover

If you have multiple 401(k)s from past employers, you can make your financial life easier by combining them into a single IRA. This makes tracking and managing your retirement savings much easier. It can also give you access to a wider range of investments and potentially lower fees than some 401(k) plans.

Consider a Roth IRA Conversion

If you have pre-tax contributions in your 401(k), converting some or all of them to a Roth IRA could be beneficial. While you’ll pay taxes on the conversion amount, future withdrawals in retirement will be tax-free. This can be a smart move if you expect to be in a higher tax bracket later in life.

Take Advantage of the NUA Rule

If you’ve invested in your employer’s stock through your 401(k), look into the Net Unrealized Appreciation (NUA) rule. This rule could help you save on taxes when selling company stock. Discuss this with your financial advisor to see if it applies to you.

Remember, managing your 401(k) is a personal decision. Research your options, consider your financial goals and risk tolerance, and seek guidance from a financial advisor. By exploring all available options, you can secure your financial future in retirement.

Make the Best Decision for Your Retirement

As you’ve seen, the question of “What happens to your 401k when you leave a job” has multiple answers. The best choice for you depends on your situation, financial goals, and how much risk you’re comfortable with. Whether you leave your 401(k) with your old employer, roll it over to an IRA, move it to a new plan, or cash it out (though we don’t recommend this), each option has pros and cons.

Think about your long-term financial well-being. Talking to a financial professional can help you make an informed choice that aligns with your retirement goals.

Take the Next Step Toward Retirement Security

Your 401(k) is a valuable asset. Take control of it and secure your financial future. SafeMoney.com can help. Connect with an expert for personalized guidance. You can also call us at 877.476.9723. We’re here to help you make the best decision for your retirement.

If you have contributed for a long time to a 401(k) plan, chances are you have built up considerable assets. You are to be commended for this effort. It takes discipline and focus to accumulate wealth over time.

Having reached this point, you may now want to explore options outside of your plan. If you are past your late 50s, you might have an opportunity with an in-service withdrawal. Many people with 401(k) accounts assume that their funds are locked tight until they retire.

What they don’t know is that they might be able to access their funds while still working at their employer. This mechanism is formally called an in-service withdrawal.

But what exactly is an 401(k) in-service withdrawal, under what conditions can you take one, and what consequences are there for doing so? Read More

As prior posts have mentioned, the 401(k) is the retirement savings plan most used by U.S. employers. Millions of Americans use it for their retirement saving goals. It’s no surprise as to why.

For one, the IRS permits pre-tax employee contributions of up to $22,500 (2023 contribution limit). Plan participants aged 50 and up are able to make pre-tax, “catch-up” contributions of an additional $7,500. Many 401(k)s also come with an employer match, providing a powerful savings incentive for U.S. workers.

Yet while the 401(k) is a valuable retirement savings vehicle, it has its downsides. One negative is the presence of high cumulative fees within some 401(k) plans and their in-plan investment menu. Over time, costly high fees can dwindle away earnings, which also siphons off money that would grow with compounding.

So there is also the opportunity cost of the money investors could have earned if those funds remained within their 401(k). It could be a difference of thousands, if not tens of thousands of lost dollars in potential retirement income. Read More

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As retirement nears for many Americans, it brings up an important question: How will their 401(k) plan prepare them to enjoy a comfortable, meaningful post-work lifestyle?

Even with these benefits, some Americans are dissatisfied with their 401(k) because they perceive shortfalls in other areas. Personal perceptions of there being limited investment options, “low” access to personal financial guidance with some plans, and a lack of money control are just a few investor frustrations.

There is also the issue of subpar financial knowledge. Surveys indicate many people don’t understand 401(k)s, even though these plans dominate the workplace savings landscape.

According to the Investment Company Institute, as of December 31, 2016 Americans held $7 trillion in all employer-based defined-contribution plans. Of this, $4 trillion was in 401(k) plans – or 57.1% of total defined-contribution plan assets. Read More

Retirement planning involves many decisions. For many retirement savers, an important question is what to do with their 401(k) retirement account. As they near retirement, investors must decide whether to leave the money within their account or choose another option, such as an IRA rollover.

The good news is Americans typically have six options for moving 401(k) assets around or leaving them alone. But not all of these possibilities may be appropriate, depending on the merits and downsides of a particular rollover option for your personal situation.

It’s also not unusual for an investor to have the lion’s share, or even a large bulk, of their retirement assets in a 401(k) plan account. So, whatever they do with these retirement assets, it’s a decision that will have tremendous implications for the future.

If you are mulling over 401(k) rollover options, be sure whoever you work with understands all the ins-and-outs of different rollover outcomes. Your financial professional should clearly explain the positives, negatives, and details of each rollover option to you. They should go over how it may help or hurt your personal situation. Read More