What Happens to My 401k When I Leave a Job or Lose a Job?
*Not financial advice - your money, your choice*
I was laid off at the end of March as part of a reduction in force or RIF layoff. This basically means that my performance, current projects, value-add, etc. were not taken into account and I was part of an emergency cut in headcount; as was most of my team & org.
Me enjoying fun-employment in Guatemala
I was lucky enough to find myself asking, “What do I do with my 401k?” so I researched some options.
When you switch jobs, get laid off, or fired there are three main options:
Leaving it with your old employer’s plan.
Rolling it over to your new employer's 401(k) or 403(b).
Rolling it into an Individual Retirement Account (IRA).
Option 1: Leave it with your old employer's plan.
Pros: It's convenient and you can keep your investments in one place. You won't pay taxes on the money until you retire. Often, you can work with the 401(k) provider to change your investments if you so choose.
Cons: You may have limited investment choices, and there could be fees that eat into your savings over time. Also, if you have an account for each employer-sponsored 401(k) over your whole life, that could end up being a LOT of funds/accounts to keep track of.
Imagine you had $10,000 in your old employer's 401(k). If you leave it there, it will keep growing without taxes until you retire. But you might have to pay fees, you may not be able to control where the money is invested if your old employer makes all of those decisions, and you may have quite a few accounts to wrangle as you head into retirement.
Option 2: Roll it over to your new employer's plan (my personal choice).
Pros: You can consolidate your retirement savings and potentially have more investment options. Taxes are deferred until retirement or if you’re using Roth accounts, are tax-free in retirement. Because this is going from custodian to custodian, you are saved the risk of owing tax on withdrawn funds. Another great thing about doing this is that any money in your 401(k) plan with your current employer is not subject to minimum distributions even if you’re over 73 (or 75 depending on when you were born). Money in other 401(k) accounts and IRA accounts are subject to minimum distributions, however. Assuming your plan(s)/employer(s) allow it, you can also roll 401(k) funds into a 403(b) and vice versa.
Cons: Like your old plan, your new employer's plan might have limited investment choices, and you may face restrictions on taking money out before retirement.
If you have a new job and your employer offers a 401(k) plan, you can transfer your old 401(k) money there. This way, you'll have all your retirement savings in one place and can continue to enjoy the tax benefits.
Option 3: Transfer it to an Individual Retirement Account (IRA).
Pros: With an IRA, you have more control over your investments and a wider range of options. It's easier to manage multiple retirement accounts if you have savings from different employers. As this would be moving between financial institutions, it’s likely that you won’t owe any tax.
Cons: Some IRAs may have fees, and you can't borrow against the money as you could with a 401(k). If you hit 73 (or 75 depending on when you were born) then this money will be subject to the required minimum distributions (RMD).
If you don't have a new employer with a 401(k) or want more investment choices, you can move your old 401(k) money to an IRA. This gives you the flexibility to invest in stocks, bonds, or mutual funds that align with your goals but may have some additional withdrawal & tax implications.
Tax Implications:
Traditional 401(k) to Traditional IRA: No immediate taxes unless you are of RMD age.
Roth 401(k) to Roth IRA: No immediate taxes unless you are of RMD age.
Traditional 401(k) to Roth IRA: Taxes are due on the amount converted.
When changing jobs or facing job loss, you have choices for your 401(k) savings. Leaving it, rolling it over, or transferring it to an IRA has benefits and considerations. Think about convenience, investment options, and tax implications to make the right decision for your retirement future. If you're unsure, it's always wise to seek guidance from a financial advisor or tax professional, ideally at an hourly rate.
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