Leaving a job is a significant life transition, and as you navigate through the changes, it’s essential to understand the fate of your 401(k) retirement account. Your 401(k) holds the key to your financial future, and knowing what happens to it when you leave a job will empower you to make informed decisions about your retirement savings. In this article, we’ll explore the various options available to you and the implications of each.
Leave It Be – Leave It with Your Former Employer:
One option available when you quit a job is to leave your 401(k) with your former employer. This might be a suitable choice if you are satisfied with the investment options and fees associated with the plan or aren’t sure what your next steps are once you leave your job. However, it’s important to note that you won’t be able to contribute to this account once you leave, and you’ll need to manage it actively, keeping an eye on fees and performance. Another downside to leaving it with your former employer is that you may forget about it over time.
Roll It Over to Your New Employer’s Plan:
If you’re moving on to a new job that offers a 401(k) or similar retirement plan, you may choose to roll over your existing 401(k) into the new plan. This consolidation can simplify your retirement savings strategy, making it easier to manage. Additionally, rolling over the funds allows them to continue growing tax-deferred. Some 401(k) custodians don’t offer this option, but it’s a great way to consolidate and keep track of your accounts.
Roll It Over into an Individual Retirement Account (IRA):
Another popular option is to roll over your 401(k) into an Individual Retirement Account (IRA). This provides you with greater control over your investments and the flexibility to choose from a broader range of options. IRAs often have a wider selection of investment vehicles, allowing you to tailor your portfolio to your specific financial goals and risk tolerance. Deciding whether to roll it into a Rollover IRA or Roth IRA depends on the type of allocation in your account, pre-tax or Roth. Pre-tax dollars can be rolled into a Rollover IRA without tax implications or converted into a Roth IRA, creating a taxable event.
Take a Distribution:
This is typically not a recommendation we will make for clients, because you’ll have to pay both taxes and penalties (assuming you’re under 59 ½). However, if you have a need for this money, this is another option.
As you embark on a new chapter in your career, taking proactive steps with your 401(k) is crucial for securing your financial future. Evaluate the available options carefully, considering factors such as investment choices, fees, and your overall retirement strategy. Whether you choose to leave your 401(k) with your former employer, roll it over to a new employer’s plan, transfer it to an IRA, or withdraw it, make a decision that aligns with your financial goals and ensures the continued growth of your retirement savings. Seeking advice from a financial advisor can also provide valuable insights tailored to your specific circumstances.
-Adrienne Davis, CPA, CFP®
All written content is for information purposes only. Opinions expressed herein are solely those of Zenith, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.