What Should You Do With Your Old 401(k) When You Start a New Job?

Thoughtful young caucasian businessman in glasses working on laptop computer.
artiemedvedev / Getty Images/iStockphoto

A job loss can wreak havoc on your finances and retirement goals. But whether leaving your job was unexpected or planned, you’ll have some big decisions to make concerning investments bound to your old employer. Specifically, you’ll need to know how to manage your existing employer-sponsored 401(k) plan.

See: 10 In-Demand Jobs To Consider in 2023
Explore: New Retirement Rules Make 401(k) Hardship Withdrawals Easier

There are several opportunities open to you upon leaving a job, depending on your employer and your plan. These options include leaving your money with your old employer, transferring your 401(k) to a new employer’s savings plan, investing it in an individual retirement account (IRA) or cashing out the 401(k).

Leaving Money Invested With Old Employer

There are numerous reasons to let your retirement plan stay the course while you change directions. Familiarity is the main incentive for leaving your 401(k) with your employer. You may not know what action you want to pursue when you leave a job or might simply like the investment choices and costs, management services and protection you already have in place that aren’t available in a new 401(k) plan or IRA.

However, according to Forbes, you will likely need to be holding a minimum balance of $5,000 in your existing 401(k) plan to keep it there or risk getting forced out. If your existing 401(k) balance is small, it is worth looking into moving it over to a new employer’s plan or to an IRA right away. You never know — a change in your investment plan may provide better opportunities for your money elsewhere.

Retire Comfortably

Transferring Money Into 401(k) Plan With New Employer

If you find a new job that offers a 401(k) plan, you can transfer the funds in your existing account to the new one without any taxes or penalties. You will still need to decide whether you like your new plan’s investment features and whether there are any transition rules you need to be aware of, but it is a common and easy option.

As Charles Schwab noted, taking notice of your new employer-sponsored plan’s regulations as you transition to a new job is key. You’ll need to reinvest your existing 401(k) funds to this new employer plan, so pay close attention to withdrawal rules especially.

Take Our Poll: Do You Think You Will Be Able To Retire at Age 65?

Moving Money Into a Traditional or Roth IRA

Moving your 401(k) into a tax-advantaged Roth or traditional IRA means you won’t need to pay taxes or penalties when you roll it over, and you won’t have to deal with 401(k) account maneuvers if you leave another job in the future.

These accounts have plenty of investment features and are yours to manage without the sponsorship of an employer. They might also have lower costs than what you were used to with your company-endorsed plan.

Retire Comfortably

For Roth IRAs, withdrawals are tax-free if you are over the age of 59 ½ and have had the account for five years or more. Of course, you’ll have to pay taxes on your existing 401(k) money when you convert them over (Roth IRAs are funded with after-tax dollars). There are no required minimum distributions (RMDs) with Roth accounts but you’ll have to start them at 72 years of age if your money is invested in a traditional IRA, whether you are employed or not.

Cashing Out 401(k)

Finally, you can always decide to not rollover or reinvest your 401(k) when you move on from a job. However, you need to beware of the potential costs if you choose this option.

Cashing out your 401(k) will give you a liquid lump sum, but as Schwab pointed out, you’re only able to withdraw money directly from your 401(k) without a 10% early withdrawal penalty “if you leave your job during or after the year you turn 55.”

Retire Comfortably

Cash distributions will cost you in taxes and penalties and should only be done if you fully understand the potential outcomes and costs. Even if you avoid an early withdrawal penalty, your withdrawal will still be taxed. Withdrawing before the age of 59 ½ will probably result in 20% of the withdrawn amount being withheld.

Learn: More Americans Turn to Freelance Amid Struggle To Find Workers
Find: What Are the Retirement Account Contribution Limits for 2023?

Additionally, any cash you neglect to transfer over to a new plan or account within 60 days will be taxed as ordinary income. In short, you could be paying a lot of taxes and penalties by not taking the time to transfer over your 401(k) to a new employer-sponsored plan or enrolling it an IRA. If you can, simply leaving it in your old company plan might make more sense than you think.

More From GOBankingRates

Share This Article:

facebook sharing button
twitter sharing button
linkedin sharing button
email sharing button
Retire Comfortably

About the Author

David Nadelle is a freelance editor and writer based in Ottawa, Canada. After working in the energy industry for 18 years, he decided to change careers in 2016 and concentrate full-time on all aspects of writing. He recently completed a technical communication diploma and holds previous university degrees in journalism, sociology and criminology. David has covered a wide variety of financial and lifestyle topics for numerous publications and has experience copywriting for the retail industry.
Learn More

BEFORE YOU GO

See Today's Best
Banking Offers

1pximage