Updated: Oct 29, 2021
Each year millions of Americans put a part of their paycheck into a 401k retirement savings plan each pay period. Employers sponsor 401(k)s, unlike Individual Retirement Accounts (IRAs). As a result, the issue arises: What happens to your 401(k) if you resign or leave your job?
This issue is actually more common than you might think. In fact, according to the Bureau of Labor Statistics, the average American will work at ten different jobs before turning 40. So, if the average individual joins in a 401k plan at some of their jobs, they'll have to determine what to do with the 401k assets in their accounts every time they leave one job to start another. If you find yourself in this situation, don’t worry, you have options, and we are going to cover some of those options with you in this article.
Option 1: Leave Your 401(k) With Your Former Employer
Most 401(k) plans enable you to leave your money in your 401(k) after you leave your job if you have more than $5,000 invested. So, if that account gives you access to low fees and unique investment options that you won’t have with your new employer’s 401(k), it might make sense to leave it there. However, if you are considering leaving your money with your former employer’s plan, it is essential to remember that if that amount is less than $1,000, the company may be able to force out the money by giving you a check.
Option 2: Rollover Your 401(k) to Your New Employer
If your new workplace provides a low-cost 401k plan with a diverse range of investment alternatives, this might be a reasonable option to explore. If you want to roll the money over to your new employer's 401k, talk to your new employer about whether you'll be able to join as soon as you're employed or if you'll have to work for a specific number of days first.
Once your account has been established, you will advise the administrator of your old employer's 401k to move your assets straight into your new employer's plan. You can also tell the previous employer's 401(k) administrator to issue you a check, but you must deposit the money into your new account within 60 days to avoid paying income taxes and perhaps incurring a penalty on the distribution.
Option 3: Roll-Over Your 401(k) into an IRA
If you're not moving to a new employer, or your new employer doesn't offer a retirement plan, you still have a good option. Your previous 401(k) can be rolled over to an IRA.
This type of IRA, known as a rollover IRA, is designed to take assets from a former employer's 401k. The first step in completing a rollover IRA is to create a new IRA with an investment advisor or financial institution. The administrator of your previous employer's 401(k) will then be notified to move plan assets straight into your new rollover IRA.
You can also have a check delivered to you directly, but make sure it's payable to your IRA custodian for the benefit of (your name). The previous plan administrator will deduct 20% of the amount for tax purposes, and you will have 60 days to deposit the whole amount, including the 20% withheld, into your rollover IRA. If you're under the age of 59 ½, failing to deposit the entire amount of money into your new IRA might result in current tax liabilities as well as a 10% penalty.
Exploring this route may also be a good investment option for you as IRAs generally have more investment options, no plan fees, and greater withdrawal flexibility.
Option 4: Cash Out Your Plan
Another option you have is to cash out the account by getting a lump-sum payout of your previous employer's 401k funds. However, you should be aware that you will not receive the whole sum in your account since you will be required to pay not just income taxes but also a 10% penalty if you are under age 59 ½. For example, let’s say a 30-year-old employee in the 32% tax bracket withdrawals $20,000 from their 401(k) plan. Well, after federal taxes and penalties, that individual will only get $11,600. Furthermore, this method may risk your future financial stability by moving cash away from retirement savings where it could grow tax-deferred.
Schedule A Consultation with an Experienced Financial Advisor
If you are about to leave a job where you contributed to a 401(k) plan, start thinking about how you'll manage the money in your account today. If you are still unsure what route is best for you, you may want to seek the assistance of a financial advisor. Financial advisors can help you determine what’s suitable for your specific situation and offer you personal guidance throughout the process.
Here at Fourth Avenue Financial, our advisor's first priority is your overall financial success. Not only can we help you determine the best option for your 401(k), but we can also help you develop, implement, and monitor a strategy that's designed to address your individual situation. If you are ready to start planning for your financial future, we are here to help. Contact us today at (304) 746 7977 to schedule a meeting with one of our experienced financial advisors or schedule online: https://calendly.com/fourthavenuefinancial/introductory-zoom.