You Left the Job. What Happens to the 401(k)?
You gave notice, wrapped up your last day, turned in your laptop, and started thinking about what comes next.
Then you remembered something:
What happens to the 401(k) you left behind?
The good news is that leaving a job does not automatically mean giving up the money in your retirement account.
But you may have a decision to make about where that money goes next.
For many people, there are a few common options. The right choice depends on the plan, your financial situation, and what you want to do with the account.
Option 1: Leave It Where It Is
In some cases, you may be able to leave your 401(k) in your former employer's plan.
That can be the simplest choice because you do not have to move anything right away.
Your account is still yours, even though you no longer work for the company.
Before deciding to leave it there, it may be worth looking at things like the plan's investment choices, fees, services, and how easy the account will be to manage after you leave.
Plan rules vary, so you will also want to confirm whether staying in the plan is an option for you.
Option 2: Move It to Your New Employer's Plan
If your new employer offers a retirement plan and accepts rollovers, you may be able to move your old 401(k) into the new plan.
Some people like this option because it keeps more of their retirement savings in one place.
Before moving the account, take a look at the new plan's investment options, fees, services, and rules.
Not every employer plan accepts incoming rollovers, so this is something to check before starting the process.
Option 3: Roll It Over to an IRA
Another possibility is rolling the old 401(k) into an Individual Retirement Account, or IRA.
An IRA may provide a different selection of investments and services than an employer-sponsored plan.
But an IRA is not automatically better than a 401(k). Fees, investment choices, services, withdrawal rules, creditor protections, and other features can differ.
That is why it is important to compare the options rather than assuming one type of account is the right fit for everyone.
Option 4: Take the Money Out
You may also have the option to take a cash distribution.
This one deserves some extra thought.
Depending on your age, the type of money in the account, and your individual circumstances, taking money out of a 401(k) may create income taxes and possibly an additional tax for taking a distribution early.
It also means that money is no longer invested in the retirement account.
A 401(k) distribution can have tax consequences, so it may be worth talking with a financial or tax professional before making that decision.
Direct Rollover vs. Getting the Check Yourself
If you decide to move your 401(k), how the money moves matters.
With a direct rollover, the money generally moves directly from the old retirement plan to another eligible retirement account.
If an eligible rollover distribution is instead paid directly to you, federal income tax withholding generally applies. You may still be able to complete a rollover within the applicable time period, but the process can be more complicated.
For that reason, it is important to understand the difference before requesting a distribution.
Do Not Forget About an Outstanding 401(k) Loan
If you borrowed money from your 401(k) while you were employed, leaving the company may affect that loan.
The rules can vary depending on the plan and the circumstances.
If you have an outstanding loan, contact the plan provider before making any decisions about the rest of the account. You do not want to find out about a repayment requirement or tax issue after the fact.
What If You Do Nothing?
Sometimes people leave an old 401(k) behind simply because they forget about it.
That does not necessarily create an immediate problem, but it can become harder to keep track of retirement accounts as you change jobs over the years.
There is another reason to pay attention to notices from your old employer.
Depending on your account balance and the terms of the plan, the plan may have rules for how smaller balances are handled after employment ends.
Do not ignore letters or emails from a former employer's retirement plan.
Make sure the plan has your current address and contact information.
Before You Decide, Compare the Details
There is not one answer that works for everyone.
Before deciding what to do with an old 401(k), consider questions such as:
What fees am I paying?
What investment options are available?
Do I want my retirement accounts in one place?
What services or guidance are available?
Will I need access to this money soon?
Are there tax consequences I should understand first?
The important part is knowing that you have choices and understanding them before moving the money.
Leaving a job can already come with plenty of decisions.
Your old 401(k) does not have to be another mystery.
Take a look at the account, understand the options available under your plan, and make the decision that fits your situation.