If your company offers you a 401(k) at work, this account can help you to save for retirement. And the good news is, when you leave your job, you get to keep any contributions you’ve made, plus any vested contributions your employer has made, as well as gains your investments have earned you.
If you stop working for an employer offering a 401(k), you will no longer be able to participate in that retirement plan, which means you can’t keep making new contributions. So you’ll have to decide exactly what you want to do with the money in this important retirement investment account. Here’s what your options are.
1. Keep the account with your current employer
In most cases, unless your former employer is shutting down its 401(k) entirely, you can just keep your account there. While you won’t be able to make any new contributions to it, you can continue to manage the investments you have.
There are benefits to this. It’s simple. You don’t have to worry about making any changes. And if you like the investments your current employer has on offer, then you can just stay the course. Unfortunately, there is a big downside. You could end up forgetting about or losing track of the money.
Estimates from Capitalize suggest that 29.2 million 401(k) accounts have been forgotten, and those accounts together hold around $1.65 trillion in assets. It may seem hard to imagine just leaving money behind, but if you change jobs a bunch of times and end up with five or 10 different 401(k) accounts, will you really remember all of them when you retire in a few decades?
2. Roll the account over to your new employer’s plan
If your new employer has a 401(k), you can usually roll over the old account to the new one. You’ll need to find out the account information by talking with the 401(k) administrator at your new job. And you’ll need to make sure the plan accepts funds transferred in, as not all do.
If you go this route, sometimes your company can just send the money directly to the new 401(k) after you fill out some paperwork. Or it can send a check made out to the new plan, which you can deposit. Your company could also send a check to you, which you’d have to deposit within 60 days, but this can create a lot more complications as taxes are typically automatically withheld when you get the check and you have to report the distribution on your taxes. And you’ll be hit with early withdrawal penalties if you don’t happen to deposit the check fast enough.
If you get the money successfully deposited into the new 401(k), no penalties will be imposed and you can just pick your investments in your new account. You can start contributing to the new account too, so all your retirement money will be in one account and you won’t risk losing it — and you can more easily keep track of your portfolio.
3. Roll the account over into a retirement account at a brokerage firm
Another option is to roll over the money to an IRA at a brokerage firm. You’ll want to be sure that you choose a traditional IRA if you have a traditional 401(k) or you could face tax penalties. Again you’ll have to see if you can have the funds directly transferred or can do an indirect transfer, get a check made out to you, and deposit it within 60 days to avoid penalties.
This approach can give you access to many more investments than most 401(k) plans make available. If you’re contributing to the IRA, you can also keep more of your retirement funds in one account. And as you leave future jobs, you can just keep rolling over retirement money into your IRA since it’s not tied to your employer. This is also a good option if your new employer doesn’t offer a 401(k).
Ultimately, any of these three options will work well — it just depends what your goals are. What you don’t want to do, though, is withdraw the funds, as this could trigger tax penalties and also leave you without the money you need for retirement if you cash out your account. As long as you don’t do that, any choice you make is a reasonable one.
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