How to ride a 401 (k) from an old job
If you find yourself quitting a job where you were actively participating in a 401 (k), chances are you don’t know what to do with it, and it could cost you dearly. When you leave a job, you have a few options on what you can do with your 401 (k). You can leave it where it is and risk forgetting and misplacing it, cash it in (which experts say is a bad idea), transfer it to your new job’s 401 (k) plan ( if there is one), or transfer it to an Individual Retirement Account, or IRA.
Experts agree that you should never cash out your 401 (k) before retirement age because you run the risk of not being on track for your golden years, let alone taxes and penalties. Instead, you should do one of two things: transfer your old 401 (k) to your new job’s 401 (k) plan, or transfer it to an IRA. Doing either of these actions will put your money in one place and give you the ability to increase your investment options.
But whatever you do, don’t leave that 401 (k) behind. Read on to learn about the pros and cons of a 401 (k) reversal and why you should consider moving it when you leave your job.
What is a 401 (k)?
A 401 (k) is an employer-sponsored retirement savings plan that allows workers to defer part of their wages to a long-term investment account. Some employers pay part of the contributions, while others provide the 401 (k) accounts themselves. By investing your money, you let it grow thanks to the power of compound interest. A 401 (k) is just a handful of tax-advantaged retirement savings vehicles available. Other options include an IRA for self-directed retirement savings, a 403 (b) for employees of public schools and tax-exempt organizations, a 457 (b) for employees of state and local governments, and certain nonprofit employees; and a TSP for the federal government. government employees.
What is a 401 (k) rollover?
A 401 (k) rollover is when you transfer the assets that you accumulated in the 401 (k) plan from a previous employer to the 401 (k) plan from a new employer or to a traditional IRA. This is something you want to take advantage of when you quit your job. “By renewing your old 401 (k) assets, you can keep your retirement savings in one place,” says Amy Richardson, CFP, senior manager and financial planner at Schwab Intelligent Portfolios Premium.
Moving your old 401 (k) will keep your money in one place. Rather than having many different retirement accounts spread out all over the place, you can keep all of your retirement money in one account. This makes it easier to follow up. It also means that you can avoid paying fees or charges twice, if both accounts charge them.
It also helps to increase investment choices and ownership. Even if you don’t transfer your 401 (k) to your new employer, you can transfer it to an IRA. This gives you more ownership over your own account, no matter what happens with your new employer. If you ever leave in the future, your Traditional or Roth IRA can stay with you.
What happens to your 401 (k) when you leave a job?
Essentially, nothing happens to your 401 (k) when you quit a job because it doesn’t automatically walk you to the next place. But you won’t be able to make new contributions or access many investment choices.
Transfer your 401 (k) to your new employer’s plan or get an individual retirement account. Leaving your retirement account behind means losing money that is yours.
“When you quit your job, your 401 (k) plan stays as is, unless you choose to renew it,” says Richardson. “Keeping your plan with your former employer means the account remains subject to that employer’s plan rules, including investment choices and withdrawal options. “
Experts recommend that you don’t cash it in completely if you haven’t reached retirement age yet, as it will hurt your ability to retire later. In addition, you will be hit with a 10% tax penalty and other fees.
“When you quit a job, all the money invested in your 401 (k) is yours,” says Brandon Renfro, PhD, CFP and founder of Belonging Wealth Management. “You can withdraw this in cash, but you’ll have to pay taxes and a 10% penalty if you’re under 59 and a half. With a rollover, on the other hand, you can transfer that money to another retirement account without incurring taxes or penalties and let it continue to grow.
Should you spill your 401 (k) from an old job?
If your new job doesn’t offer a 401 (k) plan, you may need to move your old 401 (k) to an IRA. Although similar, IRAs and 401 (k) do not have the same rules and requirements, but you will be able to invest your money in a variety of investment choices.
Steps for riding your 401 (k)
Before you can transfer your 401 (k), you will need to open an account to transfer it. Consider your options, such as your new employer’s 401 (k) or an IRA.
- Opening an account. Talk to your new employer about your 401 (k) options and they can help you transfer your account. “Not all 401 (k) accept rollovers from outside the 401 (k), so this is an important question to ask up front,” says Richardson. If they don’t offer an employer-sponsored plan, find an IRA through an online broker or robo-advisor.
- Move your funds. “You want to make sure the funds are deposited directly into your Rolling IRA to avoid the tax implications,” says Richardson. If the funds are sent to you and not to your plan, you could face a 10% tax penalty for early withdrawal. Make sure the money is deposited and out of your hands.
- Close the old account. Once you’ve moved to your old 401 (k), you can close your old account with your old employer. If you are unsure of anything, contact your former plan administrator to help you follow these steps.