An employer-sponsored 401(k) plan is a great way to save money for retirement. With matching contributions from your employer, you are essentially getting free money added to your savings. However, you may not stay with the same employer for the duration of your working years. What happens to your 401(k) account when you change jobs? Your funds will remain with your old employer-sponsored plan until you move them. You have several options for what to do with a 401(k).
With most plans, if you have invested more than $5,000 in your 401(k), you can leave it where it is when you change jobs. If you like your plan portfolio and have saved a substantial amount, this may be a good option. Although you will no longer be allowed to make contributions to the plan, it will continue to be invested as it has been, and you can change your investments if you choose to do so by working with the 401(k) provider.
When you change companies, if your new employer has a 401(k) plan, you can roll over your existing 401(k) into the new plan when you are eligible to participate, provided the plan allows rollovers. Many employers require new employees to work a certain number of days before they can enroll in the company’s 401(k) plan. Once your new account is active and ready to receive contributions, you can roll over your old account.
The best way to do this is by direct transfer from the custodian of the old plan to the custodian of the new plan. This eliminates the risk of missing a deadline or owing taxes. An alternative method, called indirect rollover, is to have the balance of your old account distributed to you in a check. The funds must be deposited into your new 401(k) within 60 days to avoid income taxes on the entire balance plus an additional 10% early withdrawal penalty if you are younger than 59 ½ years old.
If a new 401(k) plan is not available, you can roll your 401(k) into an IRA. You may open an Individual Retirement Account at the financial institution of your choice. This allows you to avoid immediate taxes and continue to grow your retirement savings tax-deferred.
An IRA may offer more investment choices than most employer-sponsored 401(k) plans. It also gives you the ability to buy or sell at any time you choose. Another advantage of rolling over a 401(k) into an IRA is a reduction in management and administrative fees, which can eat into your returns. Funds offered by 401(k) plans may be more expensive than the norm for their asset class.
If you are leaving a job where you have a 401(k), you have several options for what you can do with the funds. Consult with our experienced agent for professional guidance in making your decision.