In our hurried, fast-paced world, it’s becoming increasingly common for people to change jobs. A generation (or two) ago, our parents & grandparents spent their entire careers with the same employer, eventually sunsetting with a gold watch and a guaranteed pension. That couldn’t be further from the status quo of today’s world; I’m willing to bet you’ve changed careers/employers more than once since college.
According to the US Bureau of Labor Statistics: in 2016 the average length of time someone stayed with an employer was 4.2 years. Job and career changes are the new norm, so we’d be remiss if we didn’t discuss how that fits in with your retirement savings, and more specifically with your 401(k).
When you’re leaving a job or starting a new one with a new 401(k), you have a couple of options for how to handle the 401(k) from your (now) previous employer. We’ll unpack this more below, but in general the money needs to either stay put or find its way into another retirement account to avoid penalties and taxes.
1. You can leave it in your old company’s 401K account
Most folks will have this option, unless the size of your account is too small (typically less than $5,000) and then the employer may choose to force you out to a different account. How rude! Alas and however, this is totally within their rights.
Keeping the money in your old 401(k) will usually feel like the easiest option, because you don’t have to do anything in this situation. However, you’ll want to review this thoroughly enough to decide whether the 401(k) really is a good deal or if you might have better investment options or lower costs somewhere else.
Furthermore, you’ll still be subject to the rules & regulations set forth in that employer’s 401(k) plan, which are typically more restrictive than other retirement accounts. Lastly, it’s possible that you may incur additional administration fees that you did not have while you were an active employee; be sure to ask about this with your old employer.
Importantly, understand that once you leave that employer you cannot:
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- Contribute any more to the account
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- Receive any employer matching or profit sharing contributions
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- Vest any further into contributions already received
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- Take any loans
It’s also vital to make sure you track with the account and keep tabs on the investment options & administrative costs. If the company changes plans and you aren’t paying attention, it could cost you quite a bit by the time you figure it out. One of the biggest drawbacks in this scenario is that people are less inclined to pay attention to old 401(k) accounts.
2. You can roll it over into an IRA
An IRA is an Individual Retirement Account – a special type of investment account which has many of the same rules & features of your 401(k) plan. This is one place that you can “take” the money to without incurring any penalties or paying any taxes.
This is the most commonly used option when dealing with an old 401(k) plan, although it does require slightly more effort than simply leaving the money where it is. At the end of the day, however, it’s a pretty easy swap.
The reason most folks choose to do an IRA is that it provides a much greater level of control over investment selection and costs and doesn’t have the employer-specific rules attached to it like your old 401(k) does. In an IRA, you’re in charge and you get to pick what happens with your money. If you don’t know how or what to do in an IRA account, a financial advisor can assist in professionally managing the investments.
Furthermore, IRA accounts are typically easier to track and monitor because you’re not logging into an HR portal designed for active employees nor are you subject to the whims of your employer changing the plan. IRA accounts also have more lenient rules for taking early withdrawals – such as for the education of your family or for a first-time home purchase.
3. You might be able to transfer to your new 401(k)
This is a “sometimes option”; it depends upon the rules & policies set forth in the new employer’s 401(k) plan. Many companies will allow new employees to roll their old 401(k) into their new 401(k).
Of course, the employer won’t match your rollover money, only the contributions you make while you’re working for them. While it’s a pretty easy decision to contribute to the new plan, it can be confusing to know if you should roll the money over. There are a few reasons for and against this strategy:
Pros:
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- Having all your money in one account can make it easier to track; whereas if you leave the money in the other account, you are less inclined to pay attention to it.
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- The new 401(k) may offer lower fees or a broader investment menu than the old.
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- If you’re over age 70 ½, it can help you avoid having to take “Required Minimum Distributions” (RMDs).
Cons:
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- The new plan may be more expensive.
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- The employer rules on the new plan may not be as lenient or favorable as an IRA
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- The new plan may not offer a broad selection of investment options.
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- You’re still subject to what the employer chooses to offer you in terms of investments; e.g. you still have a lack of control.
While you may not be going through a career change now, it’s possible that you have in the past and you never made an intentional plan for the old 401(k). You might have left it at the old employer and told yourself “I’ll get to that later”.
It would be a great idea to take care of that now, and if you’d like help with your individual situation you’re welcome to reach out to any of the Invst advisors. After all – if you’re reading this article – it likely means you have a Invst 401(k) currently, and included in that plan is access to a CFP® professional.
