There are several options for how to handle your old employer’s 401k retirement savings account.
I’m leaving my job. What should I do with my old 401k account?
There are a lot of life changes that can impact finances, and these moments can often be a touchpoint for you and your financial advisor. Your advisor may have some helpful tips for you as you navigate a particular life change.
People leave employment for all sorts of reasons: moving to a new job with better opportunities for advancement or income; starting a business or becoming self-employed; getting laid off; retiring. If you’ve been contributing to your employer’s 401k retirement savings plan, you will also have to decide how to handle your 401k account. There are several options all with potential benefits and drawbacks to consider.
Here are some ways to handle your old employer’s 401k account.
- Leave it where it is, in your old employer’s 401k plan. Many employers and 401k custodians permit former employees to keep their assets within the 401k plan for a period of time.
- Potential benefits: convenient (you don’t have to take any action); can keep your current investments.
- Potential drawbacks: you may forget about the account; your account could eventually be rolled over to an IRA automatically without you choosing this option; investment options may be limited and/or fees may be high.
- Roll it over into your new employer’s 401k plan. This can be a convenient option if your new employer has a 401k. This is typically not a taxable event, meaning, no taxes are typically owed.
- Potential benefits: keep all your 401k assets in one place; assets are still classed as a 401k (which can have features IRAs don’t, such as taking a loan from your account balance); not a taxable event.
- Potential drawbacks: paperwork and phone calls to figure out how to make the transfer; some employers may not permit 401k rollovers into their plan; new 401k may have poorer investment choices or more expensive fees; of course, this option is only available if you’re moving to a new job with an employer who offers a retirement savings plan.
- Roll it over into an IRA. An IRA (individual retirement account) is a tax-qualified retirement account with similar tax benefits to a 401k, so moving your funds into an IRA is not typically a taxable event, meaning, no taxes are typically owed on this move. (I’m not talking about switching assets from pretax 401k to Roth IRA or Backdoor Roths here; I’m talking about a like-for-like switch, meaning pretax/traditional 401k to pretax/traditional IRA; or Roth 401k to Roth IRA.)
- Potential benefits: you control how the funds are invested; typically there are many more investment options available with an IRA than a 401k which has only a limited set of investments; if you already have an IRA you can roll your 401k funds into that and consolidate retirement accounts; potentially lower fees.
- Potential drawbacks: potentially confusing and time-consuming paperwork or phone calls to your current custodian to figure out how to transfer your account; you have to decide how to invest the funds amongst many choices which can also be confusing (this confusion can sometimes be alleviated with help from your financial advisor).
- Withdraw the funds. WARNING: This is a taxable event, so think careful before choosing this option. You can withdraw the cash and deposit it into your bank account. If you need money right now, because you were laid off or are in a financial crisis, this might be an option to consider. However, unlike the other choices above, withdrawing the funds in your 401k account is a taxable event so you will have to pay ordinary income taxes on this money. If you’re under 59.5, you’ll also have to pay a 10% tax penalty. So this is typically not a desirable option unless there are extenuating circumstances.
- Potential benefits: access to cash right now.
- Potential drawbacks: ordinary income taxes owed on the full withdrawal amount (if a traditional 401k); 10% penalty tax owed on the full withdrawal amount if under 59.5; assets that had been in a tax-advantaged account are no longer tax-advantaged; less funds available for retirement.
As you can see, there are several options available and potential benefits and drawbacks of each. Have you gone through this experience? What choice did you make and were you pleased with the choice for you?
Have more questions?
Your personal financial advisor can help you decide what’s the best option for your personal situation. The above is informational only and is not intended as investment advice or as a personal financial recommendation.