Old Employer, New Plan: How to Manage Your 401(k) After a Job Change
Saying goodbye to a job is often a whirlwind of activity, but don’t let your 401(k) or 403(b) fall by the wayside. From leaving it with your former employer to rolling it over to a new plan, understanding your options can help you come to a decision that makes sense for you.
Leaving the Money in Your Former Employer’s Plan
Most employers allow you to keep your retirement savings in their plan after you leave, but it’s important to weigh the pros and cons:
Potential Benefits:
Tax-Advantaged Growth: Your funds can continue to grow tax-deferred.
Penalty-Free Withdrawals: If you’re 55 or older, you can access your money without penalties.
Investment Choices: Many plans offer institutional investment options with lower costs.
Creditor Protection: Federal law protects your savings from creditors.
Potential Drawbacks:
Low Balance Rules: Accounts with less than $7,000 might be automatically rolled over to an IRA or cashed out.
Limited Contributions: You can’t add new contributions.
Unable to Take Out Loans: You cannot take a loan from an IRA like you could with an active ERISA plan.
Withdrawal Restrictions: Some plans might limit how you can withdraw funds.
Required Minimum Distributions (RMDs): At age 73 (or 75 if born in 1960 or later), you must start taking RMDs.
If your account holds appreciated company stock, be mindful of potential tax implications related to Net Unrealized Appreciation (NUA). (1)
Consider a Rollover IRA
A Rollover IRA is a retirement account that allows you to roll money from your former employer-sponsored retirement plan into an IRA.
You can open an IRA with a financial institution. Make sure to research fees and expenses when choosing an IRA provider, however, as they may vary widely. (1)
Transferring your 401(k) funds into a Rollover IRA may offer several advantages:
Tax-Deferred Growth: Continue growing your savings without immediate tax impact.
Flexible Withdrawals: Access your money penalty-free for certain first-time home purchases or education expenses if under 59½.
Broader Investment Options: Choose from a wide range of investments.
Rolling Over Assets Can Be Done by Source Type: This means you can roll over Roth assets independently to a Roth IRA. (1)
There are a few drawbacks to consider as well:
Unable to Take Out Loans: You cannot take a loan from an IRA like you could with an active ERISA plan.
Required Minimum Distributions (RMDs): At age 73 (or 75 if born in 1960 or later), you must start taking RMDs.
Transfer to a New Employer’s Plan
If your new employer’s plan accepts rollovers, this could be a convenient option:
Consolidation: Simplify your retirement savings by combining accounts.
Tax-Advantaged Growth: Your money has the chance to continue to grow tax-advantaged.
Investment Choices: Access potentially lower-cost investments offered by the new plan.
Creditor Protection: Enjoy the same protections against creditors. (1)
Cashing Out Your 401(k)
Taking the money out of your retirement account(s) altogether prior to retirement should be avoided unless the immediate need for cash is critical and you have no other options.
The consequences may vary depending on your age and tax situation. Withdrawals before age 59 1⁄2 are subject to income tax and a 10% early withdrawal penalty, though there are exceptions if you leave your job at age 55 or older. (1)
How the Rollover Is Done Is Important, Too
Whether you pick an IRA for your rollover or choose to go with your new employer's plan, consider a direct rollover, which is when one financial institution sends a check directly to the other financial institution. The check would be made out to the new financial institution with instructions to roll the money into your IRA or 401(k).
If you receive a check made out to you personally, you must deposit the full amount (including the withheld 20%) into a new tax-advantaged account within 60 days to avoid penalties and taxes. (1)
Finding Lost 401(k) Accounts
If you’ve lost track of a 401(k), start by contacting your old employer or the plan holder. You can also use your state’s database of unclaimed 401(k) plans to locate any forgotten accounts. (2)
Need Assistance?
Rolling over your 401(k) can be complex, and the right choice depends on your individual circumstances. If you need guidance or have questions about your options, don’t hesitate to reach out. Our team is here to help you navigate this important decision and help ensure your retirement savings are managed with your best interests in mind.
Article Sources:
(1) Fidelity Viewpoints. “Considerations for an Old 401(k).” Fidelity. February 26, 2024.
(2) Martins, Andrew. “Should You Roll Over an Old 401(k) to a New 401(k)?” Investopedia. July 11, 2024.
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