What to do with an old 401k after leaving your job
When you have an employer-sponsored 401k retirement plan, it’s natural to worry about what will happen to it if you move jobs. Fortunately, this is not something you need to worry about because you have options.
These options include:
- Leave the funds in your old 401k account
- Roll over the funds to your new employers 401k plan or a new IRA plan
- Cash out all your money
- Start taking distributions
Have an old 401k? Here’s what you need to do:
1. Leave the funds in your old 401k account
If your 401k funds exceed $5,000, most 401k plans allow you to leave the money the account even after you get a new employer. But if the money is less than $1,000, the company may offer you a check to force out the funds from the account.
But if the amount is less than $5,000 but more than $1,000, the company is obligated to help you open up an IRA account they can transfer the funds to if they are pushing you out.
However, if your previous employer is not forcing you out of the 401k plan, and you have a significant amount saved, you can leave it there. But if you are not happy with the plan’s fee charges or investment options, then you can consider other options.
2. Roll over your 401k plan
If you get a new job, find out if your new employer will offer you a 401k plan and when you will able to participate. Some employers require that a new employee works for several months before they are eligible for a 401k plan or any other retirement plan.
Once you enroll in a 401k plan with your new boss, you can move your old plan. You can request your employer or the administrator of the old 401k plan to transfer your funds into your new plan. Alternatively, you may choose to have the funds made to you in check form.
Whichever option you go with keep in mind that you only have 60 days to transfer all your funds from your old 401k plan into your new one. If you transfer the entire or part of the money after the 60 days, the money will be subject to income tax.
Also, ensure that before transferring your funds to the new 401k plan, it is active and you can make contributions to it before liquidating your old plan.
3. Cash out your 401k funds
Cashing out your 401k can be appealing. I mean if you have a substantial amount in your plan, think of all the things you can do with that cash. While no one can stop you from cashing out your 401k funds, your financial advisor may strongly advise against it.
When you receive a lump-sum distribution, this distribution is subject to income tax. So the bigger the amount, the higher the income tax you will be required to pay. In the end, cashing out your 401k funds may not be worthwhile if the taxes will impact your savings significantly.
You can also look at it like this, if you withdraw your entire savings, it means that you have to start saving for retirement from scratch. So it is better to just leave the funds in your old 401k plan or to roll over the old plan into a new plan.
4. Take the IRA option
If you have a new job, but your new employer does not offer a 401k plan and you don’t want to leave your old plan with your former employer, you can roll over your old plan into an IRA plan.
You can get the administrator of your old 401k plan to transfer the funds to your IRA account or you can withdraw the entire amount and deposit it in your IRA account within 2 months (60days).
There are several advantages of rolling over an old 401k into an IRA account, but the main one is that with an IRA, you can invest in whatever you want.
So if you are not happy with the investment options your old 401k offers, then it may be ideal to roll over your plan into an IRA plan, which offers better investment options.
5. Take distributions
You can take out distributions from your old or new 401k if you are over 60 years of age. If you leave your old employer for a new job or for retirement, you can start taking out distributions. However, keep in mind that when you take out distributions from a traditional 401k plan, that money is subject to income tax.
But if you have a Roth account, and you are over the age of 60, the distributions are tax-free as long as you have been holding the account for no less than 5 years. If you have not held the account for 5 years, the earnings share of your distribution will be taxed.
If you are 60 years and you switch jobs or if you choose to retire before you turn 55, you can still take out distributions from your 401k plan. Unfortunately, besides paying an income tax, you may need to pay a 10 percent penalty tax on the taxable share of your contributions.
However, the 10 percent penalty tax does not apply if you retire after the age of 55 and not before age 60.
Can you roller over part of your 401k?
Yes. You can roll over part of your 401k and leave the rest in the account. Some 401k plans allow partial rollovers, while others don’t.
A good reason to roll over your 401k plan is when it has one good investment option, but the rest are not so good. In this case, it makes sense to keep in your account just enough cash to hold that investment and roll over the rest to an IRA account.
Another advantage of partial rollovers is that you can access your money if you between age 55 and 60 without incurring a penalty. However, with an IRA account, you have to be over 60 to gain access to your money penalty-free.
So you may want to roll over part of your 401k plan into an IRA plan to be able to invest in whatever you want and leave the rest in your 401k plan to pay for your living expenses when you retire.
Some 401k plans are more flexible than others in that they offer better investment options and allow partial rollovers. So if you intend to get a new job or you already have a new job, review your options before making a decision on what to do with your old 401k plan.