What to Do with 401(k) After Leaving Job? 5 Smart Options to Consider

When leaving an employer, there are typically three workable opportunities to continue the growth of your retirement funds. Understanding which route offers more advantages for continued growth that will align with your next chapter in life is the first step.

Let’s dive into what you can do with your 401(k) after leaving a job, drawing from my own professional experiences and the wisdom gained from years in wealth management.

Immediate Considerations After Leaving a Job

Whether you’re making a career change or just got laid off, your 401(k) may be at the bottom of your to-do list. However, managing your 401(k) is an incredibly important step that must be well-thought-out.

Understand Your 401(k) Plan Rules

Every 401(k) plan is a bit different, much like how each fishing spot has its own quirks. Check your plan’s rules on vesting schedules and employer contributions. Knowing the details can help you make informed decisions about your hard-earned money.

The first step is to read through your plan’s agreement. Doing so will help you understand if your employer plan accepts rollovers as some may not. Ultimately, plan sponsors maintain the membership guidelines.

In some cases, your former employer’s plan may allow the sponsor to cash out the account when you end employment. Withdrawals could trigger income taxes and a 10 percent penalty.

Evaluate Your Financial Situation

Before making any decisions, take a moment to assess your current financial situation. Much like planning a family vacation, you need to know your budget and what you can afford.

Consider your cash flow needs, emergency funds, and any outstanding debts. Gather any appropriate account statements and contacts. When you signed up for the plan, you may have selected both a traditional 401(k) and a Roth 401(k) but keep in mind, these are two separate accounts.

Know the Deadlines

Timelines are crucial. Missing important deadlines could result in penalties. It’s like missing a tee time at the golf course – it throws off your entire game plan. Make sure you know the deadlines for making decisions about your 401k to avoid unnecessary fees.

5 Options for what to do with 401(k) After Leaving Job

When leaving an employer, there are various workable opportunities to continue the growth of your retirement funds. Understanding which route offers more advantages for continued growth that will align with your next chapter in life is the first step.

Option 1: Leave the Money in Your Former Employer’s Plan

You can leave your 401(k) with your former employer. This might be a good option if the plan offers low fees and solid investment options.

However, be aware of any restrictions or fees that could apply. If you leave money in your previous employer’s plan, it’s a good idea to have an advisor review the plan’s progress over time. With this in mind, it may be time to shift or increase the associated contributions.

Option 2: Roll Over to a New Employer’s Plan

If you’re moving to a new job, you might consider rolling your 401(k) into your new employer’s plan. This option simplifies your retirement savings and keeps everything in one place.

The previous plan’s administrator can often send the check to a designated contact. Working with your advisor will be beneficial as they can coordinate such transactions.

Option 3: Roll Over to an Individual Retirement Account (IRA)

Rolling over to an IRA gives you more control over your investments. You can choose between a traditional IRA or a Roth IRA, each with its own tax implications.

Traditional 401(k) contributions are not taxed but are subject to penalties in the case of early withdrawal. Roth contributions, on the other hand, are taxed but withdrawals have no adverse effect as long as the distribution is considered qualified by the IRS.

This flexibility is like having the freedom to choose between different fishing spots depending on what you’re in the mood to catch.

Option 4: Cash Out Your 401(k)

Cashing out your 401(k) is an option, but it comes with immediate tax consequences and potential penalties. It’s like eating all your snacks before the fishing trip even starts – you might regret it later when you’re out on the water with nothing to munch on.

Option 5: Convert to a Roth IRA

Converting to a Roth IRA can be beneficial for future tax savings. However, this decision should be made with careful consideration of your current tax situation. Think of it as deciding whether to use live bait or artificial lures – each choice has its pros and cons depending on the fishing conditions.

5 Benefits of Rolling Over Your 401(k) to an IRA

1. Greater Investment Options: IRAs typically offer a wider range of investment choices compared to 401k plans. This allows you to diversify your portfolio and potentially increase your returns.
2. Lower Fees: Many 401k plans have higher administrative fees. Rolling over to an IRA can help reduce these costs, allowing more of your money to grow over time.
3. Better Control: With an IRA, you have more control over your investments. You can choose a mix of stocks, bonds, mutual funds, and other assets that align with your financial goals.
4. Consolidation of Accounts: If you have multiple 401ks from different employers, rolling them into a single IRA can simplify management and reduce paperwork.
5. Tax Advantages: Depending on your tax situation, converting to a Roth IRA might offer significant tax benefits in retirement. While you’ll pay taxes on the converted amount now, qualified withdrawals are tax-free in the future.

Step-by-Step Guide to Rolling Over Your 401(k)

1. Review Your 401(k) Plan Rules: Confirm whether your current plan allows rollovers and understand any fees or restrictions.
2. Choose a New Retirement Account: Decide whether to roll over into your new employer’s plan or an IRA. Consider the benefits and potential drawbacks of each option.
3. Open Your New Account: If you choose an IRA, open the account with a reputable financial institution. Confirm the account type (Traditional or Roth) aligns with your retirement goals.
4. Request a Direct Rollover: Contact your 401(k) plan administrator to request a direct rollover to your new account. This process typically involves filling out some paperwork.
5. Complete the Transfer: Confirm the funds are transferred directly to avoid any tax penalties. Confirm receipt of the funds in your new account.
6. Select Your Investments: Once the rollover is complete, choose your investments based on your risk tolerance and retirement timeline.

Common Mistakes to Avoid When Handling Your 401(k)

• Ignoring the Tax Implications: Failing to understand the tax consequences of your decisions can lead to unexpected penalties and reduce your retirement savings.
• Not Reviewing Investment Options: Neglecting to evaluate your investment choices can result in missed opportunities for growth or unnecessary risks.
• Overlooking Employer Contributions: Make sure you understand the vesting schedule and the amount of employer contributions you’re entitled to keep.
• Failing to Consult a Financial Advisor: Professional advice can help you navigate complex decisions and avoid costly mistakes.
• Delaying Action: Procrastination can lead to penalties and missed opportunities. Act promptly to place your retirement funds in a position to grow.

Strategies Based on Age and Retirement Planning Stage

Early Career (20s-30s)

At this stage, you have time on your side. Focus on growth potential by investing in assets with higher returns.

• Maximize Contributions: Take advantage of compound interest by contributing as much as possible to your retirement accounts.
• Diversify Investments: Invest in a mix of stocks, bonds, and other assets to balance risk and reward.
• Consider a Roth IRA: If you expect your income to increase over time, a Roth IRA can be a tax-efficient way to save for retirement.

Mid-Career (40s-50s)

Balance growth with risk management. You might have more responsibilities now, such as children’s education or a mortgage. It’s like playing a strategic round of golf – you need to balance power and precision.

• Reevaluate Your Portfolio: Adjust your asset allocation to reflect your changing risk tolerance and financial goals.
• Increase Contributions: Take advantage of catch-up contributions if you’re over 50 to boost your retirement savings.
• Plan for Major Expenses: Consider upcoming costs like college tuition and adjust your savings strategy accordingly.

Approaching Retirement (60s)

Preservation of capital becomes more important as you approach retirement. Plan for required minimum distributions (RMDs) and consider more conservative investments. Think of it as anchoring your boat in a calm spot as you prepare to reel in the big catch.

• Shift to Conservative Investments: Preserve your nest egg by moving funds into less volatile investments like bonds and money market accounts.
• Understand RMDs: Learn about required minimum distributions and plan for the tax implications.
• Plan for Healthcare Costs: Include potential medical expenses in your retirement budget to avoid financial surprises.

Special Considerations for what to do with Your 401(k) After Leaving a Job

Handling Multiple 401(k)s

Managing multiple 401(k) accounts from various employers can become cumbersome over time. Consolidating these accounts can streamline your retirement planning and provide a clearer picture of your financial future.

Evaluate Each Plan

Start by comparing the fees, investment options, and other features of each 401(k) plan. Understanding these elements can help you determine which plan offers the best fit for your needs. Higher fees can reduce your returns, while better investment options might offer greater growth potential.

Consider an IRA for Consolidation

One effective strategy for consolidation is rolling multiple 401(k)s into a single Individual Retirement Account (IRA). This approach simplifies management and expands your investment choices. An IRA often provides more flexibility and control over your investments.

Monitor Performance Regularly

After consolidating your accounts, it’s crucial to keep an eye on your investments. Monitoring your performance to determine whether your consolidated account remains aligned with your retirement goals. Adjustments may be necessary based on performance and changing financial needs.

Dealing with Company Stock in Your 401(k)

If your 401(k) includes company stock, there are specific strategies you can employ to potentially optimize your tax situation. One such strategy is Net Unrealized Appreciation (NUA), which can offer significant tax benefits.

In short, NUA allows you to pay taxes on the cost basis of the stock at the time of distribution, rather than its market value. This can substantially reduce your tax burden on company stock held in your 401(k).

Have a Long-Term Perspective

It’s easy to get caught up in short-term market fluctuations, but maintaining a long-term perspective is vital. Don’t let temporary dips derail your retirement plans. Stay focused on your goals and remember that patience often pays off in the end.

By considering these special factors, you can better navigate the complexities of managing your 401(k) after leaving a job. Whether consolidating multiple accounts, optimizing company stock, or adjusting to economic changes, thoughtful planning and informed decisions will help you keep your retirement plan on track.

Financial Precautions

Depending on the length of your previous employment, it’s a good idea to also check the associated vesting schedules. Vesting schedules are tied to the employer’s contributions and determine the amount and date when the employer’s contributions are legally yours. Your own contributions are fully vested from day one.

Age is another contributing factor when deciding how to approach a former employer’s contributions. For instance, if you switch jobs and turn 55 in the same year, you may withdraw funds from the 401(k) without penalty.

Rolling the funds into another 401(k) or IRA imposes a higher age limit of 59½ years to avoid withdrawal penalties, depending on the plan.³ Talking with a financial advisor is the best advice when making such financial decisions in order to avoid costly mistakes.

It’s important to also keep in mind that your new employer may have a waiting period before you’re able to rollover funds. In this case, your advisor may suggest that you open an investment account to continue contributions during the waiting period.

Opening another account allows you to take advantage of the tax deduction until you make your final decision. Keeping investment growth active could be more beneficial for you in the long run.

Conclusion

From old job to new, you’re on the right track by having already started saving for retirement. By working with a financial advisor, you’ll gain further insight and understand the regulations of moving your funds in the most beneficial way. They will also help with navigating any future changes you may encounter.

If you’re interested in exploring your options in full, schedule a no-obligation financial assessment with our team of financial advisors.