If you’re quitting a job, you may be pleased to leave behind certain disgruntled coworkers and perhaps an overbearing workload. But one thing you may want to take with you is your 401(k). And yet, contrary to what you might think, you also may want to leave it where it is. You generally have a few options to make when you leave your job and have a 401(k) that remains behind. If you’re at loss for what to do, we’ll explain what you may want to do. You do have some options.
A financial advisor can help you make wise decisions with your 401(k).
What Should You Do With Your Old 401(k)?
If your inclination is to take the 401(k) away from old employer’s plan, that may be your best bet — you can make a clean split from your old firm and no longer have to deal with that company.
You aren’t required to do so, though; some people opt to leave it when there’s more than $5,000 in it. In fact, you may want or need to leave it in your old employer’s plan, at least for the time being.
For instance, you may want to leave it behind if your new job doesn’t have a 401(k) or if you were laid off and are in between jobs. Even if your new job has a 401(k), in fact, you may not be able to participate in it right away. You’re able to remove your 401(k) from your employer’s plan, but you don’t need to be in any rush to do so. You can keep it there indefinitely, if you want.
In fact, if you have a lot of money in the 401(k), and if you’re happy with the plan, you may want to leave the money in there. That said, you’ll be prohibited from making contributions to the 401(k). If you have a financial advisor, this would be an apt topic to discuss – whether to keep the 401(k) at the old employer’s or bring it somewhere else. You also may want to take a look at a 401(k) calculator.
All of that said, it may be a moot point. If there is less than $5,000 and more than $1,000 in the account, your employer will transfer the 401(k) assets to an IRA of their choice, and it generally will be done within 60 days. If you have less than $1,000 in the 401(k), you will receive a check with the balance from your employer. But as noted, if there is more than $5,000 in it, and you’re happy with the 401(k) account, you can do nothing, and your former employer can manage the retirement assets.
How to Take Your 401(k) With You
There are a number of options available for those who want to take their money out of their old plan, assuming there is at least $5,000 in the plan:
- Direct rollover. This is when you move money from one retirement account to another. If you have a new job with a 401(k) plan, as mentioned, you may have to wait until you’ve been there a little while before you participate. Six months is fairly typical, and some employers even make employees wait until they’ve been on the job for a year before they can contribute to a 401(k). That’s the longest, by law, that an employer can make you wait. Rolling over the money or doing what is called a direct transfer from the old 401(k) to the new plan won’t be difficult; you’ll talk to your plan’s administrator, and they should be able to quickly set it up. All that you should have to do is sign some paperwork.
- Indirect rollover. It’s not the best option for most people. In this case, your employer writes a check for the amount of money in your 401(k), minus 20% that goes to the Internal Revenue Service, and then you have 60 days to put it into a new 401(k). Some people may want to do that for cash flow purposes and use the money, and then when they have more cash to replace what they spend, they could put it back into the new 401(k), all within 60 days. But if you miss that two-month window, you’ll be hit with a 10% early withdrawal fee.
- Roll over the 401(k) into an IRA. This could be a wise option if you are striking out as your own boss or if your new job doesn’t have a 401(k).
- Take distributions. You can do this without being hit with a 10% tax penalty for early withdrawal, if you’re older than 59 and a half.
- Cashing out. You’ll be hit with taxes, and you’ll have less saved for retirement. Your financial advisor may try to talk you out of it, if you have one.
The Bottom Line
Your 401(k) may be worth a lot, but even if it’s just a little, you’re entitled to it.
But if you have quit a job and are excited to be working elsewhere, don’t rush to remove your 401(k) right away. You may be better off if, for the time being, your money remains at your old job, working hard and working for you.
Retirement Planning Tips
- A financial advisor can help you make wise decisions about your 401(k). Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you are using a 401(k), make sure to take advantage of any employer match available to you.
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