What To Do With Your 401k When You Change Jobs

You’ve accepted a new job, cleaned out your desk and said goodbye to your coworkers. Don’t forget another important task when changing jobs—determining what to do with the assets you have in your employer-sponsored retirement plan account. Your decision about what to do with the money in your account can have significant tax consequences, so it’s important to weigh the options and choose carefully.

You could:

  • Cash out your old 401(k) account
  • Leave the money where it is
  • Roll the funds into your new employer’s plan
  • Roll the funds into an IRA

Cash Out

Usually, cashing out the old plan is your worst choice. There will be taxes and penalties and you’ll lose the benefits of having accumulated those retirement savings.

Leave the Money Where It Is

You may have the option to leave the funds in your former employer’s plan, where they will continue to grow tax-deferred until you begin taking withdrawals at retirement. Generally, you will still be able to direct how your money is invested (if you had that ability when employed), but you won’t be able to make additional contributions. If you have significant assets in the plan and are comfortable with the investment choices it offers, leaving your funds in your former employer’s plan may be a good idea—unless something would make communicating about and managing the funds uncomfortable going forward. Some retirement plans charge higher fees when individuals are no longer employed with the company, so check to make sure the administrative fees aren’t higher than you would like.

Roll the Money Over

You can transfer the money in your former employer’s plan to an individual retirement account (IRA) or, possibly, to your new employer’s plan. You can do this without incurring tax liability or an early withdrawal penalty if you follow the rules.

The advantage of rolling funds into your new employer’s plan is that all your retirement money would be in one place, making it easier for you to monitor, diversify and rebalance your investments. However, not all plans allow participants to rollover funds from a previous employer’s retirement plan. If your new employer’s plan doesn’t allow rollovers or offer attractive investment options, you may want to rollover the money into an IRA that offers more or better choices.

Rules and Tips for Rollovers

  • In either case, in order for a rollover from your retirement plan account to remain tax-deferred, you must deposit the entire amount in a new IRA or plan account within 60 days.
  • Prior to 2002, you were unable to rollover after-tax contributions you made to your employer retirement plan. However, the legislation changed and your after-tax contributions from your old plan can now be rolled over to your new employer’s plan or to an IRA. If the plan accepts after-tax contributions, it must track your after-tax contributions separately from other contributions.
  • To keep your transfer tax-deferred, you must rollover the same assets that you had in your retirement account. For example, if your old account held stock, you must rollover those shares to your new account. You can’t take out the shares, sell them, and rollover the equivalent in cash, nor can you rollover different shares of equal value.

If your former company’s plan recordkeeper makes out a check to you for the vested balance in your account, he or she is required to withhold 20% for taxes. If you are unable to come up with the money to replace the withheld 20%, you might face a 10% early distribution penalty. You can avoid both tax withholding and penalties by asking for a direct (or trustee-to-trustee) transfer of your retirement account balance to an IRA or new employer’s plan. With a direct rollover, the distribution check from your old retirement plan is made out to the trustee or custodian of your new account rather than to you.  This way, no federal income tax will be due until you withdraw money from your account, generally, during retirement.

Managing your retirement can be complicated, especially with life changes like a new job. Your financial advisor can answer any questions and help you choose the best course of action for your situation.

About the author

Garth Scrivner, CPA/PFS, CFP®

Garth has almost 10 years of experience in financial services in a variety of roles. Prior to joining StanCorp Investment Advisers, he was a principal in his own advisory firm, serving individuals and families in the Albuquerque area with comprehensive financial planning and investment management. He is a Certified Financial Planner® professional, and has his bachelor’s degree in accounting from New Mexico State University.

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