Heritage Financial Planning

What To Do With Your 401(k) Once You Leave Your Job

February 03, 2022

If you're like most people, you'll likely be employed at more than one place throughout the duration of your career. It's normal to keep moving onwards and upwards to meet your ever expanding goals. So, when that day comes and you've secured your next career move, it's expected that there will be a lot on your mind, and your retirement plans won't necessarily be at the forefront of those thoughts. 

After all, there are a lot of different routes you could take when it comes to your old 401(k) and that can be overwhelming, especially if you don't know where to start. Let's begin by outlining some of your options so you can begin to decide which path is right for you. 

Option Explanation
Cash out Withdraw the funds from your 401(k) account and receive the money directly. However, this option may result in taxes and penalties, and is generally not recommended as it can significantly reduce your retirement savings.
Roll over to IRA Transfer your 401(k) funds into an Individual Retirement Account (IRA) with a financial institution of your choice. This option allows you to maintain the tax-deferred status of your retirement savings and potentially have more investment options.
Transfer to new employer's 401(k) plan If you start a new job with a company that offers a 401(k) plan, you may have the option to transfer your old 401(k) funds into your new employer's plan. This can help you consolidate your retirement savings in one account and continue to benefit from tax-deferred growth.
Stay with your old employer's existing plan Some employers allow former employees to keep their 401(k) funds in the old plan even after leaving the company. This option may be suitable if you are satisfied with the investment options and fees of your old employer's plan. However, you won't be able to make new contributions to the plan.
Convert to a Roth IRA If you want to convert your 401(k) funds to a Roth IRA, you will need to pay taxes on the amount converted. Once the funds are in a Roth IRA, they can grow tax-free and qualified withdrawals in retirement are tax-free as well. This option may be suitable if you expect to be in a higher tax bracket in retirement and want to potentially reduce your tax liability.

Stay With Your Existing 401(k) Plan 

This option will depend on whether or not your former employer allows this. If they do, this is an option to explore as you are leaving. Be sure to note the amount that is currently in your account. If your balance is over $5,000 you will be able to keep it where it is. If your balance is under that threshold, your past employer may push you into a few scenarios such as: 

  • If your balance is between $1,000 and $5,000 the company will likely help you set up an IRA for your existing balance if they don't cash you out.
  • In the event that your balance is below $1,000, your employer will likely cash you out and send you a check.

This option can seem like a good course of action, especially when you're actively making the transition to another employer. But it should be noted though that there are some things that you could consider while making this choice. 

  • It may be harder to keep track of your money if it stays with a former employer. You may become less vigilant about the account over time.
  • If you have been receiving tax breaks due to the in-kind distributions of the publicly traded stock at your former company, these will be lost in the event you later choose to transfer to a new employer's plan. 
  • If your former employer provided a match to your 401(k) funds, over time that money will vest. In the event that it is not fully vested at the time of your departure from the company, you'll likely only be able to keep a portion of the match. Be sure to discuss with your plan's administrator. 

Transfer Your Money To Your New Employer

Once you're settled at your new place of employment, you may elect to move your existing 401(k) to a plan with your new employer. This is a good choice to make, especially if the new plan has wider investment options or the fees are lower. 

Before you can enroll in a new employer's 401(k), you'll likely have to wait a certain length of time. When you are able to enroll, it is relatively simple to roll over your old 401(k) balance. There are two avenues you can take when making the transfer:

  • An administrator for the old account can deposit your balance into the new plan in a direct transfer. Since this transfer is made between custodians, it eliminates any risk of owing taxes.
  • The balance of the old 401(k) account can be given to you in an indirect rollover as a check. This type of rollover allows you to be the one to deposit the funds into the account. Be mindful that those funds must be deposited into your new 401(k) within 60 days. In the event you fail to do so, you will be required to pay both the income tax on the balance as well as the 10% penalty for an early withdrawal. It should be noted as well that your old employer will be required to withhold 20% for federal (and possibly state) income taxes as a result of the indirect rollover. 

Roll it over to an IRA

If you're looking for a broader range of investment opportunities, switching from a 401(k) to an IRA may be something worth looking into. This is also a valuable option in the event your next employer doesn't offer any retirement benefits. This account is not employer sponsored, so you will have to open the account on your own.

The freedom to invest how you want could help you yield the results you're looking for when it comes to your retirement plan. It's possible that rolling over to an IRA could potentially save you money in areas like administrative fees and management since these costs tend to eat into your investment returns. 

Not all IRAs are created equal, however. And each option can impact your taxes differently. If you decide to do a traditional IRA rollover, meaning you roll over your old 401(k) to a traditional IRA, any new earnings will accumulate tax deferred, and no taxes will be due when you move the money from one account to the other. If you choose to make withdrawals, however, you will have to pay taxes on said withdrawals. 

Another path is a Roth conversion (converting your old 401(k) to a Roth IRA).  A Roth IRA is similar to a traditional IRA, except that you will have to pay taxes on the money you're converting from your 401(k). 

The reasoning behind this is because unlike traditional IRA accounts, which are funded by pre-tax dollars, Roth accounts are funded by your after-tax dollars. However, once the conversion is made, and the account has been open for at least five years, you are able to withdraw any earnings tax-free—provided that you are at least 59 ½ years of age. 

Cash Out 

If you no longer wish to invest your money, cashing out is an option that is available to you. If you're looking for the cash option, be aware that this comes with a few steps that could cost you in the long run. First and foremost, taking your money out of any investment vehicle can have an impact on your retirement savings, especially if you have goals in mind. 

In addition, when you cash out your 401(k) you will be taxed on the entire amount at the local, state, and federal levels. This option may ultimately not be beneficial to you, especially if you already have a large sum of money in your account. The tax burden alone could be a detriment. Additionally, if you are under the age of 59 ½, be aware that you will have to pay a 10% early withdrawal penalty along with the taxes.

You May Also Like:

Written By: Heritage Financial Planning Team

Does Your Credit Score Affect Your Insurance Rates?

It's true, your credit score can affect many aspects of your life. From loans, to purchasing a vehicle or a house, or even setting up utilities—your credit score comes into play. But when it comes to...

Read More

Maximizing Your Lump Sum Distribution: Tips and Strategies

Receiving a lump sum distribution from a retirement account can be a game-changer in your financial journey. Whether you've just retired or left your job for other reasons, this presents a unique...

Read More

Outgrowing Your Financial Advisor: Know When It's Time for a Change

As your financial situation evolves and your wealth grows, it's vital to ensure your financial advisor keeps up with your changing needs and goals. While your current advisor may have been a great...

Read More

10440 N Central Expressway
Suite 1540
Dallas, TX 75231