What to do with your 401(k) when you change jobs?

Changing jobs comes with a tinge of uncertainty and lots of hope. With every new job, you have a chance to excel and move a step forward in your career. What many people do miss out on is the fact that every new job is also a step towards retirement and therefore, can impact your retirement planning. A 401 (K) account is a great savings tool and can contribute towards your retirement planning goals. But what happens to it when you change your job and how can you ensure that it doesn’t impact your long-term financial goals? Read on to know more!

4 Things to do with your 401k when you change your job

1. Leave the money in your previous employer’s 401 (k)

If you have a minimum balance of $5000, you can legally leave your money in your old employer’s account. This option is an easy way out because it does not require you to do anything from your end and makes the transition to the new job easier. But this is only true when you change one job. If you change multiple jobs in your career, keeping a tab on all your accounts could be very chaotic for your retirement planning. Leaving your money behind can have some other pitfalls too. For example,

Some companies may limit ex-employees from making periodic changes to their investments.
Some companies may not allow ex-employees to take distributions until they retire.
As an ex-employee, you may not be able to make partial withdrawals.
Some companies charge ex-employees extra maintenance fees for their 401 (k)s.
Some companies don’t let ex-employees take planned loans.

Be sure to read through your company’s rules and regulations in regard to 401 (k) plans. Normally, companies give employees 30 to 90 days to make a decision on what they wish to do with their money. Use this time wisely to decide if you want to keep the money or transfer it.

2. Transfer the money to your new employer’s 401 (k)

The next option is to roll over your 401 (k) account to the new employer. With employees switching jobs frequently, most companies have adapted to the situation and now accept such rollovers. Transferring your old account along with making contributions to your new account ensures that all your money stays and grows in the same place. It also makes retirement planning an easy job. Most people tend to ignore their older 401 (k) accounts due to lack of time. But if you roll it into the new account, you can make sure to implement better investment ideas and be in tune with your new company’s policies, and additional services. However, before you make a decision, go through your new company’s rules and investment options. Make sure they align with your ideas and contribute to accomplishing your retirement planning goals.

3. Move the money to an Individual Retirement Account (IRA)

The biggest advantage that comes from having an IRA account instead of a 401 (k) account is the flexibility and autonomy that can be very advantageous for your retirement planning goals. With a traditional 401 (k) account, the rules of investment are primarily made by the employer, but with an IRA account, you are quite literally your own boss. With an IRA you can invest your money in as many ways as you want. You can choose between mutual funds, stocks, and bonds; you can also pick low-cost funds for your IRA, to save money. Another big advantage of an IRA is the freedom to choose your beneficiary. By law, the beneficiary for your 401 (k) account is your spouse and wanting to change the beneficiary would need a signed permission from your spouse. But with an IRA, you can pick your own beneficiary.

However, be careful to first set up an IRA and then request your old employer to transfer the money to your new IRA or else your taxes will be withheld.

4. Take out all your 401 (k) money

Although most financial advisors will discourage you from taking this step, you can consider it as a last resort. Cashing out your retirement money before you retire is more of a loss than again. Two major expenses that come with withdrawing your 401 (k) are:

If you withdraw the money before you turn 55, you will be liable to pay an early- withdrawal penalty fee that can negatively affect your retirement planning.

Taking out your 401 (k) money also triggers taxes. Your retirement fund is seen as an income and the government will charge you income tax on it when you file your return.

Ideally, withdrawing your 401 (k) money before you retire should only be seen as a last resort in case of a financial emergency. If you must withdraw it, first calculate if your retirement savings are sufficient and then make an informed decision.

To sum it up

Whichever decision you make, make sure to read through the rules and provisions of your ex-employer and your new employers. There is no specific rule for managing your 401 (k) and if you change multiple jobs, you may resort to different options at different times. A rule of thumb is to always be up-to-date with your retirement planning goals and know where you stand in your journey to accomplish them.

Are you changing your job and confused about which way to go? Get in touch with financial advisors and let them help you transition to your new job without compromising on your retirement goals.