What to do with your 401(k) when leaving your employer
Clients often ask: Now that I have left my employer, what should I do with my savings in the company’s retirement plan?
Not to worry, you have a few options to consider when making this transition.
- Roll over to another retirement plan – If your new employer offers a 401(k) plan, you may be able to roll over your account balance into your new plan. Check with your new employer to see if the plan accepts roll overs.
- Roll over to an IRA – You can also roll over your money from your former employer’s plan into an IRA, which will offer the same tax benefits.
- Leave the funds where they are – If your balance is greater than $5,000 and your former employer allows you to do so, you can leave the funds in your existing 401(k) plan account.
- Since this may result in having retirement funds in multiple accounts, you may want to consider rolling your funds into the retirement plan at your new employer or into an IRA.
- A lump sum payment – You can choose to receive benefits as a single payment from your plan.
- If you take a distribution before age 59½ and do not transfer the money to another retirement account, the money will generally be subject to both ordinary income tax and a 10% early withdrawal penalty, unless an exception applies. If you are over 59½, the 10% penalty does not apply.
- Since this might mean having less to live on during retirement, you may want to consider transferring your retirement plan account balance to another plan or an IRA in order to protect the tax advantages of your account.
- An immediate distribution – If your account balance is less than $5,000, the plan can make an immediate distribution without your consent. The plan must first send you a notice allowing you to make other arrangements. If you do not make other arrangements, the following applies.
- If your plan balance is $1,000 or less, the plan will typically send you a check. Ordinary income tax will be withheld and a 10% early withdrawal penalty may apply if you are under 59½.
- If your plan balance is more than $1,000, the plan must automatically enroll the funds into an IRA that it selects. This protects the tax advantages of your retirement funds.
Rules vary among retirement plans, and so it is important to understand the plan rules of both your former employer and your new employer.
Additionally, be sure to compare the fees and expenses associated with any account(s) you open, whether an IRA or a 401(k), as fees can vary significantly.
Switching jobs can be a stressful process; rolling over your hard-earned retirement assets does not have to be. We hope this information can help take some of that concern off your shoulders. If you have further questions or would like to strategize the best approach for your situation, please reach out to your advisor.
Tracking #: 1-05201173