What To Do With Your 401(k) When Switching Jobs

Sep 20 · 3 min read

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Key Takeaway: Wondering what to do with your 401(k) after leaving a job? You have four main options. The best options include transferring it to your new job’s 401(k) or rolling it over into an IRA.

What To Do With Your 401(k) When Switching Jobs

If you’re leaving a job you had a 401(k) with, you’re probably wondering what you should do with it? Fortunately, 401(k)s are made to easily go with you wherever you go. When it comes to handling an old 401(k), you have four main options:

  1. Leave It Alone
  2. Transfer It To Your New Job’s 401(k)
  3. Rollover Your 401(k) Into An IRA
  4. Cash Out Your 401(k)

Let’s Get Whyze and learn about all four so you can pick the best option for you.

Option 1: Leave It Alone

If your employer allows it, you could leave your 401(k) alone if you’re not ready to make a move. This means your account will still be with the provider of your previous company’s 401(k). (Fidelity, Empowerment, etc.) Before choosing this option, you’ll want to make sure you won’t be charged any fees for not moving your 401(k). You’ll also want to make sure that your 401(k) won’t be cashed out. This could cause you to be liable for a large tax bill.

Pros

  • You don’t have to do anything
  • You can still move your 401(k) elsewhere in the future
  • Your old 401(k) investment options may be better than your new 401(k)

Cons

  • You won’t be able to add money to your 401(k)
  • May no longer be able to borrow from 401(k)
  • Managing multiple retirement accounts can be complicated

Option 2: Transfer It To Your New Job’s 401(k)

If you’re starting a new job that has their own 401(k) plan, you have the option of transferring your old 401(k) into your new one. Most companies make this process simple. Just let the provider of your old 401(k) know you want to transfer your investments to a new 401(k) and they will let you know the next steps. As long as you stick to the same type of 401(k) (Traditional to Traditional or Roth to Roth), this won’t cost you a dime.

Before transferring your 401(k), you should make sure your new 401(k) plan doesn’t have more fees than your old one. Also, make sure it has a good selection of available investments. Transferring a 401(k) from an account that works for you to one that doesn’t is always a bad move.

Pros

  • You keep your 401(k) in one place
  • Your new 401(k) may have better investments and fewer fees
  • You will still be allowed to borrow from your 401(k)

Cons

  • Your new 401(k) may have worse investments and fewer fees
  • Rolling over company stock could cost you (make sure to ask about this)

Option 3: Rollover Your 401(k) Into An IRA

The most popular option (and arguably the most beneficial) is moving your 401(k) into an IRA. This process is called a “401(k) Rollover”. Rolling your 401(k) into an IRA gives you more flexibility and control over your retirement account. Unlike a 401(k), an IRA allows you to choose from a large selection of investments. Not just the ones your employer makes available to you. You can choose to invest in funds like ETFs and Mutual Funds or you can choose to invest in individual stocks and bonds. With an IRA, the choice is yours.

Learn more about IRAs here .

Pros

  • More investment choices
  • Potentially fewer fees
  • IRAs can be managed by robo-advisors (saving you time and money)
  • You can roll multiple accounts into an IRA

Cons

  • You can’t add as much money to IRAs as you can with 401(k)s
  • Rolling over company stock could cost you (make sure to ask about this)
  • You can’t borrow/take a loan from an IRA

Option 4: Cash Out Your 401(k) (Don’t Do This)

While cashing out your 401(k) may seem tempting, it’s not the best move. Unless you are 59 ½ or older, you will be required to pay a 10% early withdrawal penalty and still be required to pay income taxes on top of that. Avoid this option unless it is an absolute emergency.

Pros

  • Cash is needed for an emergency

Cons

  • Taxes and penalties will cost you a lot of money
  • Those under the age of 59 ½ will be taxed 10%
  • The withdrawal will be taxed as ordinary income for the year
  • Stops your retirement savings from growing!