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

After starting a new job, you may wonder what to do with the 401(k) account you had in your former employer’s plan. Despite job changes, it’s important to stick to your long-term plan for retirement and continue building your nest egg. The first step to making a decision when it comes to your retirement plan is to understand your options. Here’s a breakdown of the four most common courses of action you can take with your 401(k) when you change jobs along with advantages and disadvantages.

1. Keep your retirement account in your former employer’s 401(k) plan

You may be able to leave your retirement account with your former employer. Generally, if your account balance is at least $7,000, you can often leave your account in your former employer’s plan.

One benefit of this option is that you’re already familiar with the plan, the investment options, and the expenses. However, you are no longer able to contribute to this plan.

2. Roll your retirement account into your new employer’s 401(k) plan

Rolling your 401(k) account into a new employer’s 401(k) plan is one of the most common options. The advantage of this option is that it allows you to consolidate your retirement assets, which can lead to faster growth. Consolidating your retirement assets with your new employer allows you to use an investment strategy that is easier to track and adjust as needed.

Not all employers allow rollovers into their plan. If they do, they may require you wait until you become eligible to participate. Even if your new employer does allow you to rollover your retirement account, consider the investment options and resources available to you and review the expenses attributable to the plan administration and investment options.

While rolling funds into a new employer’s plan is one of the most common options, it may not be the best option. It’s important to understand the provisions of your new employer’s plan before electing a rollover.

3. Roll your retirement account into an Individual Retirement Account (IRA)

Rolling over funds from your former employer’s 401(k) plan to an IRA is another option. This option is attractive to many because rolling over to an IRA keeps your account tax-deferred. This option is especially common among individuals whose new employer may not allow rollovers into their plan or have a service requirement for participation.

IRAs are generally less restrictive and offer a variety of providers and investment options.

Two things to consider with an IRA are the investment options and the fees. In an IRA, you will pay the expense attributable to administration, while in a company-sponsored plan, the employer may cover a portion of those expenses. Employer-sponsored plans may also use lower cost investment options for the funds offered in the plan which is advantageous from an expense and an investment performance perspective.

4. Cash out your 401(k)

Although this option may be enticing, cashing out your 401(k) early comes with consequences. A distribution is subject to federal and state income tax withholding, where applicable, and could also be subject to an excise tax/penalty for early withdrawal if you are under age 59 ½. A cash distribution may negatively impact and reduce the amount you will have for retirement.

How to determine which option is best for you

Before making a decision, know the details of your former and new employers’ plans regarding 401(k) rollovers. Being aware of these factors will help you make the best decision for your retirement savings. Take time to learn as much as you can about the different retirement resources available before you decide which option is the best one for you.

This content is intended for informational purposes only and should not be construed as tax, investment or legal advice. You should consult with your tax and legal advisors regarding your unique situation and needs. Non-deposit investment products are not insured by FDIC or any government agency and are not bank guaranteed. They are not deposits and may lose value.