KJ: Have you ever had a job that you left forgetting you had a retirement plan that you had at the prior company? Chances are this may have happened to you at some point in your career. When you leave your employer (whether voluntarily or involuntarily), there are so many things going through your mind that it’s easy to forget your retirement account you had been saving to especially since saving to your 401(k) (or 403(b)) is such an automatic process coming out of each paycheck that it’s usually out of sight, out of mind.
However, options abound when you leave your employer on what you can do with that “old” 401(k). Here are four things that can be done:
Roll it over to an IRA
The nice thing about a 401(k) is that your contributions are YOURS, so you’re able to take the funds and roll them over to another retirement account called an IRA (Individual Retirement Account). The tax nature of your contributions (i.e. if you made “pre-tax” contributions or “post-tax” contributions) will dictate what type of IRA you are able to roll your accounts to. If you have pre-tax 401(k) contributions, then you can roll those funds over to a Traditional IRA. On the other hand, if you have a portion of your account that is Roth contributions, then you can roll it into a Roth IRA.
For employer contributions, the answer isn’t quite so easy. Some types of employer contributions to your 401(k) can be rolled over, but some contributions may be forefeited (unfortunately!). For most of us who receive a regular employer match each paycheck, those funds are considered “portable” (i.e. you can take it with you) and can be rolled over with the rest of your account. However, if there is what is called a “profit sharing” component of the employer’s contribution or any kind of discretionary contribution, then the funds the employer has put into your account are likely subject to something called “vesting.” What this means is there is typically a schedule the employer has on when you “vest” (i.e. when the contributions become YOURS), and it typically takes anywhere from 1-7 years of working at an employer to receive all of the employer contributions in your account. For our household, Angela has regular matching contributions from her employer (i.e. the first 5% of her salary, her employer automatically contributes 4%) whereas contributions made to my 401(k) at work fall into the “profit sharing” bucket and thus employer contributions are subject to a schedule of vesting. If you have any uncertainty about your 401(k) and what is “yours,” then check your most recent statement (and don’t forget to ask your HR department if you have any questions!). You should be getting statements quarterly, and the portion that is “vested” should be clearly identified as well as whatever contributions you and/or the employer are making regularly to the account.
Roll it over to your new 401(k)
Just like rolling it over to an IRA, you can typically roll it over to your 401(k) with your new employer. Again, same types of rules apply as outlined above. This can sometimes be preferred if you have small accounts and don’t want both an IRA and 401(k) to keep up with or if you don’t know what to do about managing an IRA (i.e. if you aren’t willing to manage it yourself or aren’t currently working with an advisor to help you with this process).
Keep it as-is
Many companies let you keep your 401(k) with the former employer. However, some require that you withdraw the funds (noting you should really ONLY consider options of transferring to an IRA or another 401(k) as mentioned above) within the year. Each 401(k) is setup differently, so it’s important to work with your former HR department to understand your options as well as the timing of when it needs to happen.
Cash it out
NOT RECOMMENDED! While this is an option that is technically available to you, I struggle to even list this as an option. Cashing out your 401(k) involves paying taxes (Federal and/or State), significant IRS penalties if you are under the age of 59 1/2, as well as losing future retirement deferrals by not letting it grow for its intended purpose – retirement!
So, how do you work through which solution is best for you?
The answer to this question could probably warrant an ENTIRE post, but we’ll focus on just six key aspects to think through in the process:
1) Are you able to begin accessing the 401(k) with your new employer right away to roll funds into? Some companies require you wait a year before becoming eligible for a 401(k). For others, you actually have to elect NOT to participate in a 401(k) and are automatically enrolled.
2) Are you willing/able to manage your investments yourself? If so, an IRA can give you some extra flexibility.
3) Do you have an advisor that would help you manage the retirement account? Most advisors can’t work directly with a 401(k), but they can manage an IRA.
4) What are the fees associated with the 401(k) options? Look at outlining what the existing fees are with your current 401(k) (now clearly outlined on your quarterly statements thanks to a new law that went into effect in the last couple years) as well as what the fees may be with the new 401(k). Some costs are covered entirely by the employer, some may be fixed expenses, and others may be based on a percentage of your account value. Only one way to find out: run the numbers! There may be a clear winner, and it can also help you tell if an IRA may be a better target to send the funds to since most custodians allow you to open an IRA with very little money and with no annual/monthly fees.
5) Are you looking for simplicity of options? 401(k) plans usually have 5-20 options of funds to invest in whereas an IRA typically has thousands and thousands of options – a bit “the world is your oyster” so to speak. Maybe the options paralyze you or maybe they inspire you since you’re not tied down to the options offered by the 401(k) plan(s). Potato/potato.
6) How old are you, and when do you plan to stop working? If you are at or near retirement, sometimes rolling your funds into a 401(k) can be attractive. Given that if the funds are in an IRA you MUST begin taking withdrawals at age 70 1/2, the 401(k) can keep letting your funds defer past this age provided you’re still employed.
- Have you rolled funds over from a prior employer?
Do you have a transition you are going through now?
Tell us what you chose (and why).
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