What Happens to My 401(k) After Leaving a Job?

FT Contributor
A financial advisor going over a man's 401(k).

Changing jobs isn’t so rare. In a single lifetime, the average worker will hold many jobs until finally finding the right occupation.

A recent study by the Bureau of Labor Statistics shows that your age can greatly determine how many jobs you have throughout your life. Baby boomers ages 18 to 52 took an average of 12.3 jobs; men were more likely to jump around, with 12.5 jobs compared to a woman’s average 12.1 jobs.

It’s further proof that your dream job isn’t always so easy to find, so you may face a lot of job-hopping and transition before you settle into that final position for good.

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The Fate of Your 401(k)

An important part of leaving any job is the transfer of your employee benefits, such as your 401(k) plan, a benefit that grows increasingly important as you begin preparing for retirement.

In the midst of leaving one job and preparing for another, we don’t always think of our 401(k) first, but it is crucial that you look into your options to see what is available for your retirement fund. Not all retirement funds are built the same way, and what you don’t know could cost you big.

Some companies allow you to transfer your 401(k) to either your new company or your new IRA; others will keep it within the company and maintain it for you. Others yet may force you to either cash out or abandon your hard-earned savings if you choose to search for those greener pastures.

These are some of the options you may have for your 401(k) when you leave your job.

Leave the Money in Your Old 401(k)

The amount of money you have in your 401(k) will largely determine what options you have available when you decide to leave your job.

High-value accounts are handled differently. When there is more than $5,000 in your 401(k), many companies will allow you to keep your account with them.

If your new employer is not offering extra perks or benefits to their 401(k), you could be better off leaving your account exactly where it is. By law, your employer must disclose the fees and costs associated with a 401(k) plan.

Move the Money to Your New 401(k)

Accounts under $1,000 could be closed out by your employer and awarded to you in one check. You can then take these funds to your new employer, opening a new account with them.

You also usually have to work at a company for a minimum amount of time before you can either open or cash out a 401(k). For some, the perks and benefits of a better 401(k) plan are well worth the initial wait.

Roll the Money Into an IRA

Accounts valued between $1,000 and $5,000 are substantial enough that your employer is required to help you set up a new IRA in the event that you are being laid off or terminated.

IRAs are more flexible than 401(k)s, so you are likely to enjoy the enhanced freedoms you didn’t get with your 401(k).

When you roll the money from one financial institution directly to another, it is considered a non-taxable event. This is important because you are able to keep more of your money without losing any to fees.

The process is simple — your old employer’s plan administrator will handle the rollover with just some simple paperwork required in what is known as a direct transfer. However, it is your responsibility to ensure that the funds actually make it to your account, so make sure the check is not only received, but also correctly deposited into the right account.

Cash Out Your 401(k)

There is always the option of cashing out your 401(k). The balance is dispersed via check, and you have 60 days to deposit the funds into a new retirement account before you become liable for penalties.

This tends to be an ideal situation because cashing out your money likely means steep tax penalties that will eat away at your hard-earned savings, severely diminishing its total value.

However, there is a specific caveat that allows adults between the age of 55 and 59½ to take a penalty-free withdrawal. This is known as the Rule of 55 and can be incredibly beneficial at a time of such instability.

401(k) Moving Restrictions

There are some 401(k) transfer or withdrawal limitations to keep in mind, however. If you have any outstanding loans on your 401(k) plan, you will need to resolve those debts before you can make any changes to the setup of your account. Otherwise, this loan could be considered income by the IRS and fall subject to additional penalties.

Should you choose to leave your money in your 401(k) with your employer, it will not fall subject to required minimum distributions (RMDs).

Ultimately, the choice is yours to do what is best for your money. Your age and how close you are to retirement are important factors in your decision. Someone older who will be retiring soon may not see the need to move money around, while someone in the early stages of their career will likely want to establish a long-term financial setup with a new employer.

Whatever you choose, we have all the financial resources you need to help light the way.

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