What to do with a pre-existing 401(k) when you change jobs….I recently joined the White Oaks Wealth Advisors team (and I’m so excited!). For my inaugural blog post, I am writing about a topic I am personally going through right now.
I am not unique in changing jobs – early and mid-career professionals statistically change jobs much more frequently than their parents or grandparents did – and if you or your adult children are in those categories, chances are this question will come up. And while I am not yet ready for retirement, we hear this question frequently from our clients as they prepare for retirement.
You have several options, and the option you choose must make sense for your specific set of circumstances. Below, I’ve listed the main options for what to do with a 401(k) from a previous employer, along with two different to-do lists to help make the decision: what to do regarding the 401(k) before leaving the current employer, and what to do after starting a new job, if that is your next step.
So, what do I do with my 401(k)?
Options available may each have different tax and investment consequences, and it is important to weigh them carefully. When in doubt, consult with your CPA and/or your financial advisor. That said, you have four main options:
- Leave the 401(k) with your former employer if the balance is greater than $5,000
- Pros: This is easy in that you do not have to do anything with it
- Cons: Leaving your 401(k) with your old employer means you have one more account to manage, and having several accounts may get unwieldy. The fees may also be higher than other options, depending on the situation.
- Roll your 401(k) over to an IRA
- Pros: This option gives you a wide range of investment options, including an opportunity to potentially find a fund with lower expenses.
- Cons: The sheer number of available investment options can be overwhelming, and you may want a financial advisor to help you choose the options that align well with the rest of your investment strategy.
- Roll your 401(k) over to your new employer (if you are moving to a new job)
- Pros: This will help you consolidate your accounts and keep them all in one place, making them easier to manage.
- Cons: You may have limited investment options for the funds compared to an IRA. Also, some employers do not let employees roll an existing 401(k) into a new one, so it is important to double check with your new employer if you are considering this option.
- Cash it out – From a savings and retirement perspective, this is almost always a bad idea. You will have to pay both taxes and a 10% early withdrawal penalty on the balance if you are younger than 59 1/2, and it increases the likelihood that the money will be spent rather than saved for retirement.
Please keep in mind that White Oaks may have a conflict of interest due to the potential for financial benefit to the firm if you choose to have White Oaks manage your account.
Before You Leave Your Current Employer
Gathering some information on your 401(k)’s current status and what will happen with it after you leave will help you make your decision. Here are the most important to-dos before you leave your current employer:
- Check the balance of your 401(k). If the balance is less than $1,000, your employer will automatically cash out your balance and send you a check, and that amount will be subject to taxes and penalties if you don’t put it in another retirement account in a timely manner. If the balance is $1,000-$5000, your current employer may roll it over to an IRA of their choosing, potentially incurring fees along the way, if you do not direct them otherwise. If the balance is greater than $5,000, you can leave your money where it is until you decide what you want to do with it down the line, even after you have started your new job.
- Check with your employer to understand if fees on your 401(k) will increase once you leave. If the balance on your 401(k) is greater than $5,000, you may be able to leave it with your current employer, but double check if fees will increase once you terminate your employment. In some cases, employers pay 401(k) management fees for current employees, and once you leave a company, those fees will begin to be deducted from your 401(k). This is one factor to consider as you make the decision to move your 401(k) down the line.
- If you have taken out a loan against your 401(k), check with your employer to see if the loan is due in full when you leave the company. If you fail to repay the loan, the loan amount will count as income for income tax purposes, and you will also have to pay a 10% early withdrawal penalty if you are younger than 59 ½ years old. All of those expenses can add up! You may be able to negotiate a loan repayment plan with your current employer if you cannot pay it off before you leave.
When You Start Your New Job
As soon as you are eligible – sign up for your new employer’s 401(k) plan! A new job is
- a great opportunity for a fresh start – and a great opportunity to reset some of your financial habits. At the very least, try to contribute enough to your 401(k) to max out your employer’s matching, if they offer one, and potentially challenge yourself to save the maximum annual amount into your 401(k) – $19,500/year for 2020 ($26,000/year for people who are 50 or older).
Besides the savings amount, the other decision at this point is to choose an investment strategy. This can be tricky, particularly when you are offered several options. In general, a target date fund that uses your targeted retirement year will be a solid choice, but if you have questions, your financial advisor can always help you evaluate your options.
- Wait to rollover your old 401(k) into your new one until six months after you’ve started OR you are certain you are staying at your new job, whichever is longer. It is sad to contemplate, but sometimes a new job doesn’t work out, and waiting until you are certain you will stay before you rollover your old 401(k) into your new one means there is just one fewer thing to unravel if you decide that the new job is ultimately not right for you.
When it comes to managing your old 401(k) when you leave a job, there is no one-size-fits-all answer, but exploring your options can help you decide which option is best for you. As always, a financial advisor can help you weigh the pros and cons of each option in light of your specific circumstances.