How to Manage Your 401k Rollover After Leaving a Job

Leaving a job is one of the biggest decisions we make. Not only does it impact your career direction and earnings potential, but there are also implications for your retirement savings. You’ll need to make a choice about how to handle your 401k after leaving a job.

The good news is that these questions are resolvable. There should never be a reason for you to pass up an exciting new opportunity (or get out of a bad work situation) because the 401k benefits are holding you back.

401k rollover new job

Here are some tips for how to manage your retirement benefits when switching jobs.

Don’t Take A Tax Hit

Broadly speaking, you have three choices:

  • Keep your 401k plan with your former employer.
  • Rollover your 401k with your new employer.
  • Rollover your 401k into an IRA.

Since a 401k is a tax-deferred account, there are important tax considerations involved in switching your plan. Fortunately, it is relatively easy to avoid taking a tax hit.

When you leave a job, your 401k plan stays in place until you transfer it elsewhere — either into your new employer’s 401k, or into an IRA.

That means you don’t have to rush into any decisions. Before you make a choice, spend some time reviewing the plan options at your new employer. Make sure that you are comfortable with the new plan’s offering and structure. If you are, then simply roll your old 401k plan into the new one. If you roll directly from one plan to another, there are no adverse tax consequences.

(Note: If your old 401k account has a total balance less than $5,000, though, your old company reserves the right to cash you out of the plan upon leaving. Don’t worry — that doesn’t mean you’ll be forced to pay taxes. You can still set up an IRA rollover.)

IRA Rollovers Work, Too

What if your new job opportunity doesn’t offer a 401k plan? Maybe you’re leaving your job to become a full-time parent or because you want to strike out on your own as an entrepreneur. Or maybe your new employer’s 401k plan offerings just aren’t that appealing.

No problem – you can still roll your 401k plan into an IRA.

IRAs are tax-qualified plans that can be structured with a wide variety of products including annuities, mutual funds, individual stocks/bonds and various other investments. In other words, they give you a wide variety of investment choices.

If you roll a traditional 401(k) into a traditional IRA, there are no tax consequences. However, if you roll a traditional 401(k) into a Roth IRA, you’ll be executing something called a “Roth conversion,” which means that you’ll have to pay tax on the pre-tax balance.

All else being equal, you will be more tax efficient if you do a traditional-to-traditional rollover (or a Roth-to-Roth rollover, if you have a Roth 401k account with your former employer).

If you’re thinking about rolling over your money into an IRA, do so with a word of caution. The Securities and Exchange Commission (SEC) has appropriately raised concerns about some brokerage firms systematically guiding investors to rollover their 401k to the broker’s IRA accounts. This advice earns them a commission — whether or not it’s in the best interest of the individual. So be sure to do your due diligence to understand all the fees, expenses and tax implications that come along with with any decisions you make.

Should I Stay With My Old 401k Plan?

Does it ever make sense to stay with your old plan when you leave a job?

Most of the time the answer to this question is no. You will no longer qualify for employer matching levels, contributions won’t be automatically deducted from your monthly paycheck, and overall it will probably amount to an unnecessary administrative headache for you.

The only instance in which it might make sense to stay with your old plan would be if the asset allocation framework and investment selection choices are of such a high caliber that you would possibly be foregoing superior returns opportunities by switching.

Realistically, though, that scenario is extremely unlikely.

The majority of 401(k) plans offered by U.S. organizations have a relatively narrow band of investment choices. Most 401k plans offer little-to-nothing in the way of asset allocation frameworks (except for target date funds), and only offer a modest level of employee education and other benefits.

In almost all likelihood, you’ll be better off switching into your new employer’s 401k so that you can consolidate your accounts (manage fewer accounts), or into an IRA that gives you more investment choices.

Should I Cash Out My 401k?

You might be tempted to cash out your 401k savings when you leave your job.

After all, you may have some extra bills to pay as a result of leaving your job. Perhaps you’re moving to a new location, which costs money. Or perhaps you’ll experience a few weeks without paid employment during the transition.

Whatever the reason, you might be eyeing your 401k as a source of funds.

But you shouldn’t cash out that money. Roll it over into a new 401k account or an IRA.

What’s the problem with cashing out the 401k? First, your contributions are subject to a 10 percent penalty if you’re under age 59 and ½. That’s a major blow.

Secondly — and arguably more importantly — your money won’t grow over the years. By keeping your contributions invested, you’ll be able to enjoy the benefits of compounding growth. Use a tool like Jemstep’s Portfolio Manager to view how much money you’re on-track to have in retirement, based on various levels of savings at different ages.

Make a Fresh Start

Switching jobs is a great time for making fresh starts in your life.

Perhaps you never gave much thought to your 401(k) plan before. Perhaps you haven’t been making full use of the employer matching levels. Perhaps you haven’t used services like Jemstep’s Portfolio Manager to figure out the best investment strategy for your specific retirement goals and risk tolerance.

It’s time for a change.

Now is the time to make some positive changes to put your retirement planning on track.

Knowledge Is Power

Smart investing means becoming knowledgeable about financial decisions.

If you’re like most people, you will only find some answers to your questions from your 401(k) plan educational programs.

To dig deeper and get the knowledge you need, tap into the wealth of information and retirement investing services that exist online. Jemstep’s Porfolio Manager is an online service that helps you manage and grow your retirement savings. It provides expert advice that’s personalized to your situation and goals and helps you stay on track and in control with ongoing support and guidance.

Switching jobs is an exciting time in our lives. Use the positive energy to give your retirement planning a boost.


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