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What Happens To My 401(k) When I Leave My Job?

May 25, 2017
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From time to time, people will ask me questions about what happens to a 401(k) if you leave a job. Do you lose access to the money? Are there any penalties involved? There are actually three different options available to you that all avoid any unnecessary penalties. Let's go through those options, a few pros and cons for each, and how to go about putting your plan in place.

Option 1: Leave It In Your Old Job's Plan

While this may come as a surprise to you, there is not a uniform rule that makes you take your 401(k) with you once you've left a company. While you can't contribute to an old employer's 401(k), you can leave the funds in their plan all the way through retirement if you so choose.. Some companies do build in stipulations that require you to remove the funds from their plan if they don't meet a certain minimum, say $10,000. But if you are not subject to this restriction, people often choose to leave funds in a previous company's plan because they might have better investment options or lower fees than what is offered at their new job. A person who has taken loans against their 401(k) might also decide to leave the plan where it is. Depending on the plan rules, some 401(k)s won't allow you to remove the funds until any outstanding loans are repaid, and others will subtract your outstanding loans from your account balance when you roll over funds to a different account.

Option 2: Roll It Into Your New Company's Retirement Plan

Hate having to log into multiple places to get an idea of where your money is going? Consolidating accounts is one simple reason you might choose to roll your old plan into the one offered by your current employer. In comparing plans, if you find increased investment options or more favorable fees, these would also be reasons to join. The downside to rolling over an old 401(k) into a current plan is that you have now tethered that account to your new job, meaning once it's in the plan, you can't withdraw funds until you either A.) leave that job, B.) reach 59 1/2, or C.) meet one of the exceptions allowed by the IRS (see the list of exceptions here). If you don't meet this criteria, you would pay a 10% penalty and income taxes on any withdrawn funds.

If you'd like to roll an old 401(k) into your new company's plan, the first step would be to ask your human resources or benefits representative for the name of your new plan's trustee, and also their contact information. Once received, log online or call your old 401(k) provider to retrieve their form needed to roll over the funds. Some will allow you to complete the entire process online, while others might require you to not only sign a paper form, but married couples might also need to have their spouse sign the form in the presence of a notary. By law, married couples have to either list their spouse as a beneficiary, or have the spouse sign a form giving consent to name a different beneficiary. When moving 401(k) funds, married participants often have to adhere to a similar level of transparency; certain plans don't allow rollovers without a signature from a spouse.

Option 3: Roll it Into an Individual Retirement Account (IRA)

As we mentioned in Option 1, some companies force you to roll your old 401(k) into an IRA if it doesn't meet a certain threshold. Opponents to the IRA strategy argue that many IRA options could have higher fees, especially those managed by a broker or investment advisor. While we feel that the right strategy could be worth a fee, you don't want to pay more for something without good reason, so make sure you either know how to evaluate different investments or know someone you trust to help you.

Aside from the potential for higher fees, which can be managed if it's a concern, IRAs also don't offer the ability to take loans against your account. While I am wholeheartedly against 401(k) loans, which we'll cover in the future, it is a feature you won't find if you rollover your old account into an IRA. Additionally, legal experts have argued that 401(k)s offer more protection than IRAs in instances such as bankruptcies and civil judgments. If you're an entrepreneur or high profile person, or even a landlord worried that you might be subject to a lawsuit, the potential increased risk might factor into your decision.But force isn't the only reason one might consider rolling into an IRA.

While IRAs can potentially have higher fees than 401(k)s, they do offer increased investment options. In a 401(k), you're limited to investing in the mutual funds offered by your employer plan. In an IRA, however, not only can you invest in a larger number of mutual funds, but also individual stocks, bonds, or even REITs (Real Estate Investment Trusts); all options that aren't available in 401(k)s. An additional benefit to an IRA is that you are free to move the account as you see fit. If you'd like to try out new managers, different platforms or strategies such as annuities, the freedom that comes with an IRA is the way to go.

That's it! I hope that this cleared up some of the confusion regarding options for 401(k)s from old jobs. If you need help making your decision, seek the advice of a professional you trust, and find a plan of action that's right for you!