What Should You Do With Your 401(k) When You Change Jobs

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What Should You Do With Your 401(k) When You Change Jobs?

July 26, 2024

The days of working for one company for your entire career and retiring with a pension are long gone. Today, the average worker will change workplaces more than 5 times during their career, and the advent of employer-sponsored retirement plans like 401(k) accounts may mean having to account for more than 5 different retirement accounts. When leaving a job, it's important to consider what to do with your 401(k). This retirement savings plan is often a significant portion of your retirement funds, so it's crucial to understand your options and the implications of each choice.

One option is to leave your 401k with your former employer. This might be the most convenient option, but that does not mean it is always the best. Some employers may charge higher fees for former employees, and you may have limited investment options. Also, if you have retirement accounts at multiple employers, it can become quite a challenge to manage all of them. Leaving behind your 401(k) can also lead to it being forgotten. Studies estimate that up to $1.65 trillion may be sitting in "ghost" 401(k) accounts that employees have left behind and forgotten about.

Alternatively, you can roll over your 401k into a new employer's plan, if the option is available. This can reduce the stress of keeping track of separate 401k accounts, but it's important to compare the investment options and fees between the new employer and the former.

Another recommended option is to roll over your 401k into an Individual Retirement Account (IRA). This is the most common option, especially for individuals heading into retirement. This can offer advantages such as a broader range of investment options, lower fees, and more control over your retirement savings. Using a 401k-to-IRA rollover can simplify the process by providing a consolidated view of your retirement nest egg.

When deciding to do a 401k-to-IRA rollover, be careful with the transfer method you choose. One common mistake is choosing a direct withdrawal, where the funds are transferred to you instead of directly to the new account. If this occurs, the IRS mandates a 20% withholding tax. If the full amount received does not get deposited into the new account within 60 days, the entire lump sum may be subject to additional taxes and early withdrawal penalties. The best way to avoid unnecessary fees and taxation is to do a direct rollover, where the funds transfer directly from the 401(k) custodian to the IRA custodian.

Deciding what to do with your 401k when you leave a job is a critical financial decision. Whether eaving it with your former employer, rolling it over to a new employer's plan, or transferring it to an IRA, each has its benefits and drawbacks. As advisors, we can assist you in making the best decision for your unique situation.

For more information on 401k rollovers or assistance in the process of a rollover, please contact our financial planning team.

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