What To Do With Your 401k When Leaving a Job to Get the Most of Your Money

Wondering what to do with your 401k when leaving your job? It’s a question that’s bound to come up pretty early in the process of preparing to leave your job.

Before you decide what to do with your 401k, review all your choices. The impact on the amount you can have for retirement can be large.

You have a few options:

#1: Keep the money in your former employer’s 401k plan.

#2: Roll the money into your new employer’s 401k plan.

#3: Roll the money into an IRA.

When deciding what makes the most sense for you, review each choice paying particular attention to the quality of your fund choices as well as whether there are low cost options in each plan. Making an informed choice can mean more money for retirement.

Let’s review some frequently asked questions about your three account choices and then we’ll walk through an example of the impact in money you can have for retirement by making an informed choice.

Will I Take a Huge Tax Hit When I Leave My Job And Move the Money?

Since your 401k plan is a “deferred income vehicle” – meaning you haven’t paid income taxes on your 401k money yet – many people worry that there may be tax implications to moving.

Don’t worry. There is no reason to suffer adverse tax consequences, as long as you roll your 401k into another tax-advantaged account. If you want to close your account with your former employer, you have two options: moving your 401k into your new employer’s 401k plan, or moving it into an Individual Retirement Account, or IRA.

As long as you roll the funds directly into one of these two vehicles, you should not take a tax hit. And rollovers are pretty straightforward: any financial institution that provides these plans can handle the paperwork for you promptly and efficiently.

Action Tip: DO NOT withdraw (“cash out”) your 401k, and manually try to move the money into a new fund yourself. This might trigger a tax penalty. Instead, ask the financial institution that provides your new 401k or IRA plan to manage the rollover.

Will I Lose a Good 401k Investment Strategy?

Some people worry that they’ll lose a great investing strategy if they leave their job. In most cases, they probably won’t.

The sad truth is that very few employers offer any kind of a coherent strategy in their 401k plan offerings. Only a small handful offer any kind of asset allocation strategy customized to your individual goals and risk tolerance or to your entire portfolio, including accounts outside of your plan. (A growing number of plans offer Target Date Funds, but they are one-size-fits-all and may be inappropriate for your situation).

Now, if you are one of the lucky folk whose current 401k plan has a smart allocation strategy built around it, don’t fret. You have the option to stay in your current plan after you leave, provided that the asset value is greater than $5,000. (If it’s less, the company has the right to cash you out upon departure).

What About My Fund Choices?

If you move from a 401(k) plan to an IRA, you will most likely have more fund choices. 401(k) plans typically offer access to a very limited number of funds (and studies show that the quality of the funds many plan administrators choose leaves a lot to be desired).

With an IRA you can choose as many mutual funds, ETFs and other asset types as you want. If you’re moving to another company that has its own 401(k) plan then you will want to understand what choices that plan offers – but again, chances are that you won’t be taking a cut in your menu of choices.

Should I Continue to Invest in a 401k After Leaving My Job?

You are allowed to contribute $17,500 annually to your 401k plan (more if you are over 50). If you leave your job for the opportunity to be self-employed, you an open an Individual 401k, also known as an “i401k” or a “Solo 401k.” Your employee contribution limit for a solo 401k fund is the same as it would be if you were working at your previous company.

Of course, the 401k isn’t your only option. You can contribute $5,500 to an IRA even while making the maximum contribution to your 401k. If you are educated about investment choices and want more flexibility, an IRA can be a useful vehicle. But the tax-deferred benefits, coupled with the higher contribution limits, makes a 401k an attractive option.

Deciding What Location Can Give You the Most Money

Let’s say that you start a new job, and you’re deciding whether or not to rollover your former employer’s 401k into your new employer’s plan. You like the idea of consolidating accounts, but you want to review the plan fees and options before you make this move.

What should you do?

Jemstep’s Portfolio Manager can give you a projection of how much money you’re on-track have for retirement, under each of the three scenarios: keeping your 401k with your former employer, moving it to your new employer, or rolling it into an IRA.

Let’s look at a hypothetical 35-year-old who has $20,000 saved in her former employer’s 401k plan.

For example purposes, this person’s current portfolio is kept entirely in cash at her former employers’ plan. We also assume that she earns $100,000 annually at her new job and contributes $15,000 per year into her new employer’s 401k, which she allocates based on Jemstep’s recommendations.

As you can see, in this scenario, she’s projected to have $92,784 per year in retirement to spend at her old employers plan if she acted on Jemstep’s recommendations.

But wait! What would happen if she rolled over her account to her new employer’s 401k plan?

Now she is projected to have $104,042 per year in retirement, based on the superior offerings within her new employer’s plan.

Finally, let’s check it against her third option: rolling her 401k into an IRA.

This option is projected to give her $103,348 per year in retirement if she acted on Jemstep’s recommendations.

By running these scenarios, she can see that her best choice is to roll her 401k into her new employer’s plan, and then allocate that money based on Jemstep’s specific buy-and-sell recommendations.

Final Thoughts

The main thing to remember? You have choices. Don’t let retirement worries get in the way of the right decision for your career.

Are you getting ready to leave your job? What are you going to do with your 401k?