WHAT TO DO WITH YOUR 401K AFTER LEAVING YOUR JOB
Whether you’re starting a new job or retiring, here’s what you need to know about your retirement plan.
Article published: April 09, 2024
When you leave an employer, whether it’s to take another job or to retire, you may be wondering, “What should I do with my 401k?”
There are several options available, and the right one can depend on your circumstances. Let’s look at the choices for what to do with your 401k when leaving a job – and the pros and cons of each.
Leave your 401k at your employer
One simple choice is to leave your 401k right where it is for now, provided your current employer allows that.
Pros:
- Your account has the potential to grow tax-deferred and you won’t have to pay taxes on it until you take a withdrawal.
Cons:
- You can’t make any more contributions to it, and the plan provider may charge you a fee for maintaining the account.
- There’s added paperwork too if you do start a new 401k at your new job – you’ll have to track Required Minimum Distributions for multiple accounts once you begin taking RMDs.
- 401K accounts may have more limited investment options compared to a rollover IRA.
Roll the 401k into your new employer’s retirement plan
If you are starting a new job, you may decide to move the money into your new employer’s 401k retirement plan.
Pros:
- You have the potential for tax-deferred investment growth, and you may be able to delay taking the RMD if you continue to work for the company past age 72.
Cons:
- These are not true “cons” but things you should be aware of. You will have to contact the plan administrator to liquidate your existing 401k and invest the proceeds in the new one, and the money will be subject to the withdrawal rules of the new plan.
Cash out your 401k
You may want to take your 401k funds as cash, whether you’re retiring or taking a new job.
Pros:
- You’ll have the liquidity and reserves provided by cash.
Cons:
- Keep in mind you will be responsible for paying taxes (there’s a mandatory withholding of 20%) as well as an additional 10% penalty if you withdraw the funds before turning age 59½ and don’t roll them over into a qualified plan (like another 401k or an IRA rollover) within 60 days. So if you’re younger than 59½, this option should be taken only if you are willing to pay upward of 30% in taxes.
Rollover 401k to ira
You may also consider moving your funds into an IRA rollover.
Pros:
- An IRA rollover can simplify things if you change jobs again because you own it outright (rather than it being administered by an employer).
- And IRA rollovers may give you a wider range of investment options than your employer’s 401k retirement plan.
Cons:
- You will have to make your own investment decisions, and you must start taking the RMD at age 72 (73 if you reach age 72 after Dec. 31, 2022), even if you are still employed.
Before you do decide to open an IRA rollover with the 401k from your former employer, here are some things to consider:
- The available investment options for diversification.
- Any costs and account-related fees and expenses.
- The account’s service-level availability.
- Whether the account offers penalty-free withdrawals between ages 55 and 59½.
- Whether loans are permitted within the account.
- Whether there is legal protection from creditors under federal law.
- The amount of the RMD once you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).
- Any factors relating to employer stock.
- Any state tax considerations.
There is a lot to think about when deciding what to do with your 401k when leaving a job. An independent financial advisor can help you decide which option is right for you.
Neither Edelman Financial Engines nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from your qualified tax and/or legal professionals to help determine the best options for your particular circumstances.
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