Your 401(k) can significantly impact your retirement savings, even during job transitions. What happens to your 401(k) after you leave a job? Here are eight key things to consider.^^
If you’re changing jobs or have been laid off, your 401(k) account might be the last thing on your mind. However, handling this important financial resource wisely can set you up for a secure future. Paying attention to your retirement funds can lead to better long-term gains, regardless of how much you've saved. Let's explore what happens to your 401(k) when you depart from a job and the best practices for managing it.^^
1. Understanding Outstanding 401(k) Loans
Did you take a loan from your 401(k)? If you did, you need to act swiftly when leaving your employer. According to Mat Sorensen, CEO of Directed IRA and Directed Trust Company, under the 2017 Tax Cuts and Jobs Act, you have until the tax return deadline of the next year to repay the loan into an IRA. Failing to repay your 401(k) loan leads to a loan offset, where the outstanding loan balance is deducted from your vested account, resulting in tax implications and penalties. This is a crucial step to avoid financial repercussions.^^
2. Options for Handling Your 401(k)
Post-departure, you have several options for your 401(k) account
- Leave the account with the old employer
- Roll it over to the new employer’s 401(k)
- Transfer it to a traditional or Roth IRA
- Take a lump sum distribution (cash it out)
If your balance is under $1,000, your ex-employer may automatically cash you out. Analyzing these choices can help you align them with your financial goals and retirement strategy.^^
3. Deadline for Moving Your 401(k)
If your balance is $7,000 or more, you have the luxury of time. Recent changes due to SECURE Act 2.0 increased the amount you can leave with your employer without immediate action. There's no rush to decide, but it’s still wise to start contributing to your new employer’s 401(k) from day one. This proactive approach ensures you maximize contributions and employer matches. If the balance is below $7,000, the employer may automatically move your funds to an IRA or cash you out, which could lead to being subject to taxes and penalties if you don't roll it over promptly.^^
4. Comparing Plan Costs
Reviewing the costs associated with various retirement plans is essential. Fee transparency is crucial for evaluating which option is best for you. Request participant fee disclosures from both your old and new 401(k) plans to identify all the associated costs. Examine your investments and goals to make an informed choice between keeping your old 401(k), rolling it into a new plan, or transferring it into an IRA.^^
5. Monitoring Your Old 401(k)
If you choose to leave your 401(k) with your old employer, keep the account active by periodically checking your statements. It's easy to forget about old accounts, especially during job transitions. In one case, Peggy Cabaniss, co-founder of HC Financial Advisors, recalled a client who discovered his account was difficult to access years later due to the company going bankrupt. Keeping an eye on performance ensures you are always aware of your retirement funds and can act quickly if necessary.^^
6. Managing the Rollover Process
Should you decide to roll your funds into your new employer's plan, initiate the process with the HR department for assistance. Most employers have personnel dedicated to helping with rollovers, ensuring a smooth transition. You must complete the rollover within 60 days to avoid taxes and penalties, so tracking the process is vital.^^
7. Rolling Over into an IRA
Transferring your 401(k) into an IRA? It can offer more investment flexibility and options. Just like with a 401(k) rollover, maintain awareness of the 60-day window to reinvest your funds. If your old 401(k) includes company stock, inquire if your IRA provider has the expertise to handle such assets correctly, as they can have different tax implications.^^
8. Cashing Out a 401(k): Risks Involved
Cashing out a 401(k) is a tempting yet often unwise move. A survey by Alight revealed that nearly 40% of individuals cashed out after job termination from 2008 to 2017. This could significantly affect your retirement savings. Even small amounts, when invested wisely, grow exponentially over time. Before opting to cash out, consult a financial advisor to explore better alternatives that will benefit your future.^^
How much of your 401(k) do you get when you leave an employer?
You retain 100% of your contributions, but employer matches depend on your vesting status and the specific settings of the plan. Check how much is vested in your plan, as this will affect your withdrawal amount.^^
How long can a company hold your 401(k) after you leave?
Your employer can hold your 401(k) until you decide to move it, provided your balance exceeds $7,000. If it’s lower, they can move it to an IRA or cash you out, which could result in losing the tax advantages offered by retirement accounts.^^
The most important move you can make when handling a 401(k) left at an ex-employer is to ensure it remains set aside for retirement. Time and compound interest can work wonders on your savings. If you’re uncertain about rolling over, transferring to your new employer’s plan, or staying with your old 401(k), consult a financial planner. Your future self will undoubtedly appreciate the wise choices you make today.