What Happens To Your 401(k) When You Quit Your Job?
When you quit your job, you may leave behind a 401(k) that you are unsure what to do with. You may be able to leave your account with your old employer, depending on the balance. Alternatively, you may roll over the money from the old 401(k) into your new employer’s plan or an individual retirement account (IRA). You can also withdraw some or all the money, which may lead to serious tax consequences. There are several options to choose from, all having their own pros and cons.
Keep the 401(k) Where It Is
Keeping your 401(k) at your old plan is easy because you don’t have to go through the paperwork process of rolling it over to another account. However, if you don’t check the account often or update the investment allocation, you may want to consider rolling it over to your new plan or an IRA. The more investment accounts you have, the more you have to keep up to date with tax documents, beneficiaries, investments, account security, etc.
Rollover Your 401(k) to a New Plan
If your new employer offers a 401(k), you can always transfer the old account to your new plan. You can contact the administrator of the old plan and have them deposit the balance of your account directly into your new plan by filling out some paperwork. This is called a direct transfer, and it helps avoid the risk of owing any taxes or missing the 60-day rollover deadline.
Alternatively, you can elect to have the balance distributed via a check payable to the receiving plan. This is called an indirect rollover. The funds must be deposited into your new 401(k) within 60 days to avoid paying income tax and a 10% early withdrawal penalty on the entire balance. The disadvantage of this option is it takes time and the potential taxes incurred if missing the 60-day deadline. The advantage is that your accounts are consolidated, which makes them easier to manage for investment purposes.
Rollover Your 401(k) Into an IRA
If you are not moving your old plan to your new employer, or maybe they don’t offer a retirement plan, another good option is rolling it over into an IRA. If you don’t have an IRA already open, you must open one before you begin the rollover process. The advantage of utilizing an IRA is the investment flexibility you will have. In a 401(k), you generally have more limited investment options.
Cash Out Your 401(k)
You can always liquidate your old 401(k) and take a lump-sum distribution. However, this does reduce your retirement savings, and you will be taxed on the entire amount. Depending on your account size, this may even push you up a tax bracket. Additionally, you will incur a 10% early withdrawal penalty. The tax burden of a complete withdrawal may not be worth the significant tax consequences you may incur.
If you leave your job, your 401(k) will remain as is until you take action to move it. There are several options on what to do with the account going forward, but each option has pros and cons, some more than others. Whatever option you choose, be aware of any potential tax consequences you may incur, and always ask for help if you are unsure of what to do next. The last thing you want to do is make a mistake and then receive a tax form stating you owe a significant amount to the IRS.