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One of the best benefits that employers nowadays offer are employee-sponsored retirement plans, commonly known as 401(k)s. These accounts are tied to employers and often come with perks like contribution matching. However, if you’re planning for a job change in the near future, you may be wondering what happens to a 401(k) when you change jobs.
You have several options, each with their own benefits and conditions. Here’s what you should keep in mind.
How much of my 401(k) will I get if I change jobs?
When you leave a job, voluntarily or involuntarily, you’re entitled to your vested balance.
Vested balance: your own contributions, typically any investment earnings on those amounts, and employer contributions and earnings that have satisfied your plan's vesting schedule.
Every plan has its own vesting schedule—a timetable that explains when the employer contributions made to your account become your property. The vesting schedule can vary quite a bit from plan to plan, so it’s wise to review the details of your particular plan before you leave your job.
There are several types of vesting schedules that employers use. With cliff vesting, you will be 100% vested in your employer's contributions after a certain period of service—typically three to five years. On the other hand, if your employer does graded vesting, your vestment will increase 20% per year until you're fully vested after six years. Plans can have faster vesting schedules, and some even have 100% immediate vesting. You'll also be 100% vested once you've reached your plan's normal retirement age.
It's important for you to understand how your particular plan's vesting schedule works because you'll forfeit any employer contributions that haven't vested by the time you leave your job. Your summary plan description (SPD) will spell out how the vesting schedule for your particular plan works. If you don't have one, ask your plan administrator for it. If you're on the cusp of vesting, it may make sense to wait a bit before leaving, if you have that option.
Your 401(k) Options When You Leave Your Employer
Whenever you change jobs, you typically have four main options for your 401(k):
- Leave the money where it is
- If your new employer offers a 401(k), roll the money into the new account
- Roll the money into another retirement account
- Cash out your 401(k)
Let’s dig into these four options a little deeper.
Option 1: Leaving Your Money Where It Is
If your vested balance is more than $5,000, you can leave your money in your employer's plan at least until you reach the plan's normal retirement age— even if you no longer work there.
| Pros | Cons |
|---|---|
It’s simple. If you like your current plan, you don’t have to go through the hassle of finding a new plan that may not be as good. | Communication may get harder. You may lose out on important communication and notifications about your plan when you no longer work for that employer. |
Enjoy lower fees. Your old employer’s 401(k) may have lower account fees than other options such as an IRA. | You may have multiple accounts to manage. If you leave your money where it is and get a new 401(k) at your new job, you’ll be juggling two accounts. |
Employer retirement plans generally provide greater creditor protection than IRAs. Most 401(k) plans receive unlimited protection from your creditors under federal law. Your creditors (with certain exceptions) cannot attach your plan funds to satisfy any of your debts and obligations, regardless of whether you've declared bankruptcy. | The earliest you can access your money penalty-free is 59 ½. But if you rollover your 401(k) to your new employer, you can start taking out funds as early as age 55 if you have quit, been laid off, or fired from your job between the age of 55 and 59 ½. |
Option 2: Rolling Your Money into a New 401(k)
Your new employer may also offer a 401(k) plan. If this is the case, you will have the opportunity to roll the money from your old employer’s 401(k) to the new one.
How do you move your 401(k) when you change jobs?
There are two types of rollovers: direct and indirect. With a direct rollover, the money transfers accounts without the owner ever touching the money.
To do this, contact your old 401(k) plan’s administrator. They will be able to provide any forms you need to fill out and walk you through the specific steps. Your new account’s administrator should also give you information regarding how and where the money should be transferred.
With an indirect rollover, you will receive a check in the amount of your old account balance. It is then up to you to put the money into the new account. You’ll have a certain number of days (usually 60) to do this. If you don’t transfer the money within the time frame, you may face steep penalties and taxes.
| Pros | Cons |
|---|---|
All of your retirement money will be in one place. Instead of worrying about different accounts with different employers, you can streamline your investments in one account. | You may not have as many options as you would with other plans. IRAs typically offer more investment choices compared to a 401(k). |
You may have a loan option. If your employer’s plan allows it, you may be able to borrow against your 401(k) amount. This option is typically only available with your current workplace’s 401(k). | You have little control over your money in a 401(k). With a 401(k), most decisions are made by the plan’s administrator, leaving you with little power over your money in the account. |
You may be able to take distributions at age 55. The Rule of 55 is an IRS exception that allows those who have quit, been laid off, or fired from their job between the age of 55 and 59 ½ to withdraw money from their 401(k) sponsored by that employer. | |
Employer retirement plans generally provide greater creditor protection than IRAs. Most 401(k) plans receive unlimited protection from your creditors under federal law. Your creditors (with certain exceptions) cannot attach your plan funds to satisfy any of your debts and obligations, regardless of whether you've declared bankruptcy. |
Option 3: Rolling Your Money Into an IRA
Similar to how you can roll your money into a new 401(k), you can also roll it over into an IRA, which is not tied to any employer.
| Pros | Cons |
|---|---|
You have more investment choices with an IRA than with an employer's 401(k) plan. You typically may freely move your money around to the various investments offered by your IRA trustee, and you may divide up your balance among as many of those investments as you want. | You might have higher fees. Though you may be able to find plans with low fees, many accounts may charge more than your average 401(k). |
You can freely allocate your IRA dollars among different IRA trustees/custodians. There's no limit on how many direct, trustee-to-trustee IRA transfers you can do in a year. This gives you flexibility to change trustees often if you are dissatisfied with investment performance or customer service. | IRA yearly contribution limits are much lower. If you want to keep your money in one place and continue contributing to your IRA, keep in mind that the contribution limit is much lower than that of a 401(k). IRAs have additional restrictions, so it’s important to consult a financial advisor to make sure your contributions are valid. |
An IRA may give you more flexibility with distributions. Your distribution options in a 401(k) plan depend on the terms of that particular plan. Consult a financial advisor on your particular plan options. | IRAs offer fewer protections against creditors. Unlike 401(k)s, IRAs offer far fewer federal protections against creditors. |
You can rollover your 401(k) plan distribution to a Roth IRA. You'll generally have to pay taxes on the amount you roll over (minus any after-tax contributions you've made), but any qualified distributions from the Roth IRA in the future will be tax free. |
Option 4: Cashing Out Your 401(k)
This is typically the least desirable option. While it might be appealing to withdraw all of your funds, there are penalties involved. If you take a distribution, you'll be taxed at ordinary income tax rates on the entire value of your account except for any after-tax or Roth 401(k) contributions you've made. And, if you're not yet age 55, an additional 10% penalty may apply to the taxable portion of your payout.
If you need to cash out your 401(k), try and minimize the tax impact. For example, if you have nontaxable after-tax contributions in your account, keep in mind that you can rollover just the taxable portion of your distribution and keep the nontaxable portion for yourself.
What’s the right choice for my 401(k)?
Assuming all options are available to you, there's no right or wrong answer to this question. It all comes down to your specific financial situation and goals. When evaluating whether to initiate a rollover always be sure to:
- Ask about possible surrender charges that may be imposed by your employer plan or new surrender charges that your IRA may impose
- Compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan
- Understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your old employer plan
Doing these three things can help you understand the best path forward. As with any decision involving investments or retirement accounts, we recommend talking to a financial advisor.
Take Care of Outstanding 401(k) Loans
In general, if you have an outstanding plan loan, you'll need to pay it back, or the outstanding balance will be taxed as if it had been distributed to you in cash. If you can't pay the loan back before you leave, you'll still have 60 days to rollover the amount that's been treated as a distribution to your IRA. Of course, you'll need to come up with the dollars from other sources.
Make the Right Money Moves with Your Retirement
This decision is a big one that may have significant consequences, both now and in the future. There are strong arguments to be made for most of your 401(k) rollover options. You need to weigh all of the factors, and make a decision based on your own needs and priorities. A financial advisor is well-equipped to help you figure out the best option for your financial health.
* Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer Member FINRA/SIPC and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Before deciding whether to retain assets in an employer-sponsored plan or rollover to an IRA an investor should consider various factors including but not limited to: investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Before you elect to open an IRA account and engage your investment representative, please review all account statements and disclosure documents related to the IRA and services to be provided under a new relationship and consult with a qualified tax advisor as needed. If transferring an existing retirement plan into an IRA, you should be aware that (i) Those assets will no longer be subject to the protections of ERISA (if applicable) (ii) depending on the investments and services selected for the IRA, you may pay more or less in transaction costs than when the assets are in the Plan, (iii) if you are between the age of 55 and 59 ½, you would lose the ability to potentially take penalty-free withdrawals from the plan, (iv) if you continue working past age 70 ½ and transferred your plan assets to a new employer’s plan, you would not be subject to required minimum distribution and (v) withdrawing assets directly would be subject to federal and applicable state and local taxes and possibly be subject to the IRS penalty of 10% if under age 59 ½.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018.
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