What happens to my 401(k) when I quit?

There are many things to think about when you decide to change employers, including what happens to your 401(k). The good news is that your retirement savings won’t disappear like other employer-provided benefits like health insurance and paid vacation.

You have several options for managing your legacy 401(k) and similar retirement plans so that your portfolio can continue to build wealth and meet your long-term financial goals.

Table of contents

1. How to deal with your old 401(k)
1. do not do anything
2. Transfer to your current employer
3. Roll over to an IRA
4. Open a self-directed IRA
5. Redeem it
2. FAQ
3. Final thoughts

How to deal with your old 401(k)

In most situations, you can decide how your old 401(k) plan is managed after a career transition. It doesn’t matter if you quit, get fired or laid off.

Here are the 5 most common 401(k) options.

do not do anything

The default option is to leave your current 401(k) with the same provider until you’re ready to transfer it or start taking distributions when your balance exceeds $5,000.

However, employers can exercise the following rights with smaller balances:

• Balances between $1,000 and $5,000: Transfer the money to an IRA of the company’s choosing.
• Balances under $1,000: Clear all holdings and send you a paper check for the balance (this is a Taxable transaction unless you deposit funds into a tax-advantaged account within 60 days)

If you choose to keep your 401(k) where it is for the time being, you can continue to rebalance your portfolio and use the plan provider’s current investment options.

There is no deadline for transferring or redeeming your portfolio, and it is possible to keep it parked until you retire and can make penalty-free distributions.

Unfortunately, you can no longer donate new money or receive matching donations.

When it comes to employer contributions, make sure the matching contributions are fully legitimate before transferring your balance so you don’t give back some of the earnings.

In addition, you must continue to pay annual management fees, which can be either a flat amount or a percentage of your account balance. Since this fee can be relatively high, you may decide to transfer or transfer your account to a low-cost investment account to avoid this fee.

Transfer to your current employer

If you’re happy with the investment options in your new employer’s 401(k) plan, you may be able to rollover the balance from your old 401(k) and avoid taxes and penalties. Consolidating 401(k)s can be an excellent decision if the new plan provider has comparable or lower fees.

You may need to initiate a transfer request from your old provider, but your new provider can usually complete the process. First, check with your new plan provider about how a direct 401(k) rollover works and your role in the process.

Generally, you’ll need to fill out a transfer request form and provide account information, and the providers will take it from there.

Depending on your current portfolio allocation and new plan provider, it’s possible to make an in-kind contribution that keeps your current stock and mutual fund holdings intact.

It is also possible that the old supplier may liquidate shares and make a cash deposit. Although you get to decide how you invest the money, these stock sales are tax-free because they take place in a tax-advantaged account and you don’t request a withdrawal.

Why a Direct 401(k) Rollover May Not Work?: If your old employer rolled over the funds to an IRA or liquidated the balance within 30 days of your termination, you may not be able to roll the money directly into your new 401(k) plan.

Although this policy seems harsh, it minimizes the operating costs of your old employer. Contact your former human resources department or follow the correspondence sent by mail about your pension plan options.

Roll over to an IRA

If you don’t like your new employer’s plan, an IRA rollover gives you more flexibility. You’re also much less likely to pay annual account maintenance fees if it’s a self-directed account, although managed IRAs do charge fees.

The recycling process is simple and only takes a few days. Whether you have one or more old 401(k) plans that you want to convert to an IRA, using a service like Capitalize can simplify the process.

The most common option is to convert a traditional 401(k) to a traditional IRA and a Roth 401(k) to a Roth IRA.

Your new broker may also allow you to rollover a traditional 401(k) to a Roth IRA. The conversion amount is subject to income tax, but you won’t pay additional taxes or penalties on future winnings when your account has been open for at least five years and you’re at least 59 ½ years old.

Open a self-directed IRA

Most people associate a rollover IRA with an online stock brokerage, which is used to invest in stocks and bonds.

You can also use alternative assets like physical real estate or precious metals, but you’ll need to use a different IRA to continue investing tax-advantaged.

A self-directed IRA fulfills this investment purpose and gives you more freedom to invest. It is also an excellent investment opportunity for an accredited investor.

Self-directed IRAs charge an annual account management fee similar to a 401(k). Therefore, consider this option when you have a substantial portfolio.

Redeem it

There are several situations where liquidating your 401(k) contribution and getting cold hard cash in your bank account is a better choice. However, younger workers are likely to face the dreaded 10% early withdrawal penalty.

You will be retired soon

This option makes the most sense when you are at least 59 ½ years old and can take penalty-free distributions, even though your pre-tax assets are subject to ordinary income tax.

If you have a Roth 401(k), make sure the first contribution was made at least five years ago, as your withdrawals will still be subject to the 10% early distribution fee even if you’re of legal age.

Instead, you can invest your returns in low-risk investments that earn competitive returns with lower volatility.

72

The IRS reserves an equal retirement plan distribution under Section 72

While this option slows your withdrawal rate to preserve your retirement fund, before you reach 59 ½ taken distributions, a 10% early distribution fee applies unless you have a qualified exception.

Difficulties with withdrawals

Most early withdrawals are subject to a 10% federal penalty in addition to income tax. It is possible to waive payment for these eligible expenses:

• IRS taxes
• Unreimbursed medical expenses (more than 10% of adjusted gross income)
• Health insurance premiums while unemployed (qualified IRAs only)
• Separation of service (after age 55 and after age 50 for public safety employees)
• First-time home buyers (IRAs only, up to $10,000 per person)
• Corrective distributions (after additional 401(k) contribution)

As with any fee waiver, terms and conditions are subject to change at any time. Additionally, withdrawal instructions differ between 401(k)s and IRAs, and you may need to request an IRA rollover first. You can read the IRS rules here for more information.

Rather choose a Taxable account / you have short-term financial needs

Paying a 10% penalty may be a small price to pay to have more flexibility with your retirement savings. Even if you no longer enjoy traditional or Roth tax benefits, you can invest in a taxable brokerage account, pay off debt, or cover other one-time expenses.

For example, you may need funds to pay bills during a career transition or to purchase an investment property or other alternative assets.

Cashing out your 401(k) isn’t the best long-term financial move if you have a few decades until retirement and your nest egg needs additional funding. Additionally, it can be challenging to find funds to top up your distribution, and your money is uninvested, such as a 401(k) loan.

As a result, consider repatriating your 401(k) as a last resort.

FAQ

How long can you leave your 401(k) at your old job?

It’s possible to keep a 401(k) balance over $5,000 at your old employer indefinitely, as long as you pay the annual account service fees.

However, federal regulations allow workplaces to automatically roll balances between $1,000 and $5,000 into an IRA or liquidate less than $1,000. You have 60 days to transfer the funds to an eligible retirement account and avoid taxes and penalties.

Can your employer keep your 401(k) if you are laid off?

No, employers cannot withhold employee 401(k) contributions under any circumstances. However, it is possible to collect payments financed by the employer, which are not in full.

Are there 401(k) rollover fees?

Generally not, although you may have to pay a final account management fee with your old provider, and your new provider may charge a similar recurring fee. A rollover IRA is the best way to avoid account fees in the future.

Are 401(k) rollovers taxable?

No, transferring your 401(k) to your new employer or converting it to a similar IRA (ie, a traditional 401(k) to a traditional IRA) won’t incur the usual taxes or penalties. However, your balance is taxable when you convert a traditional taxable account to a Roth IRA.

Final thoughts

You don’t have to worry about what happens to your 401(k) when you quit your current job or are laid off, because you’ll always have access to the funds.

In most situations, you don’t need to take immediate action. Instead, focus on more critical things during your career transition.

The notable exception is when your balance is less than $5,000, as you may need to roll over to another retirement account in time to avoid taxes and penalties.