What Happens to Your 401k When You Change Jobs

 

As a fee-only financial advisor, one of the most common questions I’m asked is, “what happens to my 401(k) plan and savings when I change jobs and employers?” It’s a good question to ask, but one that can slip through the cracks if you’re not paying attention (or haven’t hired someone to pay attention).  In this article, I address what you need to know about your 401(k) when you move to a new employer, and the options you have to maintain and grow your employer-sponsored retirement savings.

 

JUMP TO

What is a 401(k)?
What are my options for my 401(k) when I change jobs?
How do I choose the best option?
Why should I work with a fee-only fiduciary investment manager?

 

What is a 401(k)?

 

A 401(k) is a type of retirement savings account, sponsored by one’s employer, that allows you to contribute a portion of your pre-tax income and enjoy tax-deferred growth on your investments.  When employed, the employer generally matches some portion of your contribution, but matching payments stop upon your termination.

 

What are my options for my 401(k) when I change jobs?

 

When you leave a company, you have to decide what to do with the money in your 401(k). There are 4 different options to consider:

• Leave it in your old employer’s plan.
• Roll it over to your new employer’s plan.
• Open an IRA (individual retirement account).
• Withdraw the funds.

Each option has its own features, pros and cons, and tax implications. Let’s take a closer look at each one.

1. Leave it in your old employer’s plan

The simplest option is to do nothing and leave your 401(k) balance in your old employer’s plan.

Pros: This may be a good option if you are happy with the investment choices, fees, and rules of the plan.

• You can still access your account online and monitor its performance.
• You’ll retain the right to roll over or withdraw the funds at any point in the future.

Cons: It’s important to remember there are some (costly) drawbacks to this option as well.

• You’ll no longer be able to contribute to the plan, and you may have to pay additional fees because you are no longer an employee.
• You’ll have to keep track of multiple accounts and manage their required minimum distributions (RMDs) when you reach age 72. RMDs are the minimum amount that you have to withdraw from your tax-deferred accounts each year, or else face a 50% penalty on the shortfall.

2. Roll it over to your new employer’s plan

In other words, transfer your 401(k) balance from your old plan to your new employer’s plan, if they offer one.

Pros: This may be a good option if you like the new plan’s costs, features, and investment choices.

• You’ll be able to consolidate your retirement savings in one place and continue to enjoy tax-deferred growth.
• You’ll also be able to delay RMDs beyond age 72 if you continue to work at the company sponsoring the plan.

Cons: However, there’s some challenges (and rules) to this option as well.

• You’ll need to liquidate your current 401(k) investments and reinvest them in your new 401(k) plan’s investment offerings. This may trigger taxes and fees if you are not careful.
• You’ll also have to follow the rules of your new plan, which may limit your withdrawal options or impose other restrictions.

3. Open an IRA

Consider rolling over your 401(k) balance into an IRA (individual retirement account).

An IRA is a type of retirement savings account that you own directly, rather than through an employer. You can open an IRA with any financial institution that offers them, such as a bank, brokerage firm, or mutual fund company.

There are two main types of IRAs: traditional and Roth.

1. A traditional IRA works similarly to a 401(k), allowing you to contribute pre-tax income and enjoy tax-deferred growth.
2. A Roth IRA allows you to contribute after-tax income and enjoy tax-free growth and withdrawals in retirement.

Pros: Rolling over your 401(k) into an IRA may be a good option if you want more control and flexibility over your retirement savings.

• You’ll have access to a wider array of investment options and services than either your old or new employer-sponsored plan.
• You’ll avoid paying taxes on the rollover amount, as long as you complete it within 60 days of receiving the distribution from your old plan.

Cons: Conversely, there are some expenses that will be incurred in this option.

• Once you roll over your funds into an IRA, they may no longer be eligible for a future rollover into a 401(k) plan. You’ll also have to pay taxes on any withdrawals from a traditional IRA, and RMDs apply at age 72 regardless of whether you’re employed.
• Also, you’ll need to specify how the funds in your IRA are invested. Until you do so, the money will remain in cash or a cash equivalent, such as a money market account, rather than invested.

4. Withdraw the funds

It’s always an option to withdraw the funds from your 401(k) and use them as you wish.

Pros: This may be tempting if you need cash for an emergency, a major purchase, or to pay off debt.

Cons: This is usually the worst option for your long-term financial health. Here’s why:

• You’ll lose the opportunity for tax-deferred growth on your retirement savings.
• You’ll have to pay income taxes on the withdrawal amount, plus a 10% penalty if you are under age 59 1/2.
• You may push yourself into a higher tax bracket and reduce your eligibility for other tax benefits.
• You’ll have to save more in the future to make up for the lost savings.

Advice from an Advisor: Unless you have no other choice, you should avoid withdrawing your 401(k) funds when you change jobs.

 

How do I choose the best option?

 

As you can see, there is no one-size-fits-all answer to what to do with your 401(k) when you change jobs. The best option for you, depends on your personal situation and preferences. Consider these questions when determining your plan:

• How much money do I have in my 401(k)?
• Am I satisfied with my old employer’s plan or would I like my new employer’s plan more?
• Am I comfortable with managing my own investments?
• When do I plan on retiring or accessing my savings?
• How much income tax am I willing to pay now or later?

To make an informed decision, you should compare the investment alternatives, fees, rules, and tax implications for each option. You should also consider your overall financial goals and retirement plan.

 

Why should I work with a fee-only fiduciary investment manager?

 

If you’re feeling overwhelmed or confused by the choices, you may benefit from working with a fee-only fiduciary financial planner.

A fee-only fiduciary is a type of financial planner who charges a flat fee or a percentage of assets under management, rather than commissions or hidden fees. Following a fiduciary standard of care, they act in your best interest at all times, rather than selling products or receiving kickbacks.

 

A fee-only fiduciary financial planner can help you:

• Evaluate your options and choose the best one for your 401(k).
• Create a personalized retirement plan that aligns with your goals and values.
• Optimize your asset allocation, diversification, and risk management.
• Minimize your taxes and fees.
• Maximize your retirement income and security.

 

At Winthrop Partners, we are proud to be fee-only fiduciaries who serve our clients with integrity and expertise. We are also certified financial planners (CFPs) and chartered financial analysts (CFAs), which means we have the highest level of education and experience in the financial planning industry.

If you are looking for a trusted partner to help you with your 401(k), retirement planning, or any other financial needs, we invite you to contact us today for a free consultation. We would love to hear from you and help you achieve your retirement goals.

 

Disclosures:

The views, opinions, and content presented are for informational purposes only. They are not intended to reflect a current or past recommendation; investment, legal, tax, or accounting advice of any kind; or a solicitation of an offer to buy or sell any securities or investment services. Nothing presented should be considered to be an offer to provide any product or service in any jurisdiction that would be unlawful under the securities laws of that jurisdiction. All investments involve risk, including the possible loss of some or all of the principal amount invested. Past performance of a security or financial product does not guarantee future results. Investors should consider their investment objectives, risks, and risk tolerances carefully before investing. The Firm has made every attempt to ensure the accuracy and reliability of the information provided, but it cannot be guaranteed.