Making the most of your retirement funds

What to Do With Your 401k When You Leave Your Job

by Roger Wohlner

Perhaps you are retiring or perhaps you are moving on to another opportunity. Whatever the reason, there are many issues to deal with. One of the most important issues is what to do with your 401(k) balance when leaving a job.

With a defined contribution plan such as a 401(k), you typically have several options to consider upon separation. A discussion of the three main options follows.

Leaving your money in the old plan

I'm generally not a fan of this approach. Over the years I've worked with several clients who have had several 401(k) accounts that have been left with old employers. All too often these accounts are neglected and add to what I call "financial clutter," a collection of investments that have no rhyme or reason to them.

In some larger plans, participants might have access to an excellent menu of low cost institutional funds. Many of these larger plans are among the cheapest in terms of administrative costs. If this is the case, it might make sense to leave your account with your old employer. However, it is vital that you manage your account in terms of staying on top of changes in the investment options offered and that you reallocate and rebalance your account when applicable.

Related: Choosing Beneficiaries for a 401k Plan

Rolling your account to an IRA

Rolling your old 401(k) to an IRA might be appropriate if:

  • Neither your former employer's nor your new employer's 401(k) plans are top-notch.
  • You are comfortable managing and choosing your own investment options or you are working with a financial advisor who does this for you.
  • You are looking for a place to consolidate your retirement investments other than a current or new employer's retirement plan account.
  • Certainly you should look at the IRA custodian's account fees, any fees to buy or sell investments, and the availability of investment options that are appropriate for your situation. Additionally you are free to roll your account to an IRA at the custodian of your choice. You are under no obligation to roll your account to an IRA with the firm that provides your old company's 401(k) no matter how much they may urge you to do so.

Rolling your account into your new employer's plan

If allowed by your new employer's plan, this can be a viable option for you if you are moving to a new job. You will want to ensure that you consult with the administrator of your new employer's plan and follow all of their rules for moving these dollars over.

This might be a good option for you if your 401(k) balance is small and/or you don't have significant outside investments. It might also be a good option if your new employer has an outstanding plan, including solid investment options and low expenses.

If the new plan looks like a good option, then it might make sense to roll your balance over to your new company's plan. This will eliminate the need to keep track of your balance with your old employer and might offer some additional advantages in terms of having a higher balance in the plan under certain circumstances.

Other considerations

A fourth option is to take a distribution of some or all of the dollars in your old plan. Given the potential tax consequences, I generally don't recommend this route. A few additional considerations are listed below:

  • The money coming out of the plan is always taxable, except for any portion in a Roth 401(k), assuming that you have satisfied all requirements to avoid taxes on the Roth portion.
  • You will likely be subject to a penalty if you withdraw funds prior to age 59 1/2 with some exceptions, such as death and disability. If you think you will need to withdraw these funds prior to age 59 1/2, this might favor leaving the funds in your old employer's plan. There is a method for those under age 59 1/2 to withdraw 401(k) funds and avoid the penalty called 72(t). Consult with a financial advisor knowledgeable in this area if you are considering this complex option.
  • If your old plan offers a match, there is likely a vesting schedule for their matching contributions. Your salary deferrals are always 100% vested (meaning you have full rights to them). If you are close to earning another year of vesting, you might consider this in the timing of your departure if this is an option and it makes sense in the context of your overall situation.
  • If your company makes annual profit sharing contributions, they might only be payable to employees who are employed as of a certain date. As with the previous bullet point, it might behoove you to plan your departure date around this if the amount looks to be significant and it works in the context of your overall situation.
  • If you are 70 1/2 or older and still working, you are not required to take annual required minimum distributions from your 401(k) as long as you are not a 5% or greater owner of the company. This might be a reason to consider rolling your old 401(k) to your new employer's plan. Again consult with your financial advisor.

There are a number of options for an old 401(k) or similar retirement account when leaving your employer. The right course of action will vary based upon your individual circumstances. The wrong answer is to ignore this decision.

Reviewed April 2017

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Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, IL, where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participant, and foundations and endowments. Roger is active on both Twitter and LinkedIn. Check out Roger's popular blog The Chicago Financial Planner, where he writes about issues concerning financial planning, investments, and retirement plans. Roger is also a regular contributor to the US News Smarter Investor blog.

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