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

Skip West

Most employers offer 401k plans as a way for their employees to save for retirement. When you change jobs, you may need to decide what to do with your 401k.

The decision depends on several factors, including what you value in a retirement account and what your current employer offers.

Leave it where it is

401(k) plans are a popular way for employers to help employees save for retirement. They allow you to keep money tax-deferred and often come with tax breaks and other benefits.

When you change jobs, you will likely have to decide what to do with your 401k. Each option has its pros and cons.

If you have a lot of 401k savings in your old plan, leave it where it is for a while. You can do this by going it in your former employer’s plan or moving it to the 401(k) plan at your new job.

While it’s tempting to cash out your 401(k) money, doing so before you turn, 59 1/2 can trigger an early withdrawal penalty. It also reduces your retirement nest egg.

Roll it over

Rolling over a 401k is the easiest way to move your retirement savings when you change jobs. It’s usually quick and painless — you need to call the 401(k) provider at your old employer and ask that they transfer your account directly into their plan.

There are a few things to consider before you decide whether or not to roll your 401k over, including what kinds of investments your former employer offers, what fees they charge, and what vesting options you have with their matching funds.

When you roll your 401k over, there are two main options: Direct Rollover or Indirect Rollover (60-day rollover).

With a direct rollover, your former employer will send you a check that is made out to you and has no tax withholdings. However, there may be better choices than this option if you’re under the age of 59 or 12 or if you owe federal taxes on the money you receive from your previous employer.

Transfer it to an IRA

One of the best options when you change jobs, is to transfer your 401k funds to an IRA. This option can help you avoid taxes and early withdrawal penalties.

The only downside to transferring your 401k funds to an IRA is that you’ll lose some of the tax-deferred growth on your savings. However, this may be worth it if you have higher goals, such as college tuition or significant life events.

While most employers offer a limited menu of investment options in their 401k plans, a rollover into an IRA can give you more freedom to invest your money and potentially lower fees.

Before making a decision, you should talk to a financial planner or CPA to make sure your options are correct for you. Also, remember that 401ks allow you to withdraw your money without penalty until age 55 (unless you’re still working), while IRAs require you to wait until age 59 1/2 before you can take a distribution.

Cash it out

Switching jobs can be a stressful process, but it’s important to remember what you should do with your 401k. The right decision can reduce or avoid tax liability, maximize your savings, and help ensure your nest egg keeps growing.

Among the many options offered to 401(k) plan participants when they leave their jobs is cashing out. This is almost never a wise move, however, because it can significantly reduce your retirement savings.

In fact, the U.S. is one of only a few developed countries that allow firms to present cash-out options to departing employees.

When a company tries to persuade an employee to cash out their 401(k) balance, they send them a form letter that nudges them to consider the option. This turns a psychologically illiquid source of retirement security into a ready cash resource.