What You Can Do With Your Old 401(k) When You Leave your employer?

If you are a job-changing employee and must decide what to do with an old retirement plan,

• Leave the account where it is
• Roll it over to your new employer’s 401(k) on a pre-tax or after-tax basis
• Roll it into a traditional or Roth IRA outside of your new employers’ plan
• Take a lump sum distribution (cash it out)

Some items to consider include:

• Your current account balance
• Whether you fear collection actions, because workplace plans provide creditor protection that IRA’s don’t
• Quality of your new company’s retirement plan versus your former plan in terms of investment options, fees and whether or not loans are permitted
• Options available to you in an IRA outside of your employer’s plan

The good news is that you do not have to make any decisions about your existing 401(k) immediately. 

Leave Your Account Where It Is

• Many companies allow you to keep your 401(k) savings in their plans after you leave your job. Often that's only if you meet a minimum balance requirement, typically $5,000. Since this option requires no action, it is often chosen by default. But leaving your 401(k) where it is isn’t always a result of procrastination. There are some valid reasons to do it.

• You can take penalty-free withdrawals from an employer-sponsored retirement plan if you leave your job in or after the year you reached age 55 and expect to start taking withdrawals before turning 59 1/2.

Move Your Old 401(K) Assets Into a New Employer’s Plan  

• You have the option to avoid paying taxes (including a 10% early-withdrawal penalty tax) by completing a direct, or "trustee-to-trustee," transfer from your old plan to your new employer's plan, if the employer's plan allows it.
• It can be easy to pay less attention to your old retirement accounts, since you can no longer contribute. So, transferring old 401(k) assets to your new plan could make it easier to track your retirement savings.
• You also have borrowing power if your new retirement plan lets participants borrow from their plan assets. The interest rate is often low. You may even repay the interest to yourself. If you roll your old plan into your new plan, you’ll have a bigger base of assets against which to borrow. One common borrowing limit is 50% of your vested balance, up to $50,000. Each plan sets its own rules

Rolling into an IRA? Stay on top of the move

• If you decide to roll over your 401(k) into an IRA not sponsored by your new employer, your IRA sponsor or advisor will help guide you through the process to ensure the money gets to the proper destination in a timely manner. (The same 60-day deadline to re-invest applies here as well.)
• Be sure your new broker/advisor has experience with rollovers, especially if you have company stock in your 401(k). Why? Because company stock is liquidated when it’s rolled into an IRA, and later, when distributed, may be taxed as ordinary income resulting in a higher tax liability.
• As recommended above, stay vigilant until your money is safely in its new home and that you have proof — typically verified online through the IRA provider’s website.

Cashing out a 401(k) is popular, but not so smart

• Intellectually, consumers know that cashing out retirement accounts isn’t a smart move. But plenty of people do it anyway. As discussed, you may be forced out of your former plan based on your account balance, but that doesn’t mean you should cash the check and use it for non-retirement related purposes. In the long run, your financial future will be better served by rolling the money over into an IRA or if applicable, your new employer’s 401(k) plan.
• A 2020 survey by Alight, a leading provider of human capital and business solutions, found that 4 out of 10 people cashed out their balances after termination between 2008 and 2017. About 80 percent of those who had an account balance of less than $1,000 cashed out, while 62 percent who had balances between $1,000 and $5,000 did the same.
• Based on historical rates of return, a $3,000 cash out at age 24 leads to a $23,000 difference (5 percent loss), in your projected account balance at age 67, so even a small amount of money invested into a retirement vehicle today can make a big difference in the long run.

Professional Guidance

Many retirement plans offer specialized money-management services with competitive fees that you may wish to maintain.

Protection Against Lawsuits

Employer-sponsored retirement plans provide broader creditor protection under federal law than is provided with an IRA