When You Change Jobs, What Should You do with Your 401(k)?

Skip West
3 min readMar 25, 2023

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For their employees to save money for retirement, most firms provide 401k plans. Choosing what to do with your 401k may be necessary if you move to employment.

What you value in a retirement account and what your current workplace offers are some elements that will influence your choice.

Employers frequently use 401(k) programs to assist staff members in their retirement savings. They often include tax savings and other advantages and let you save money tax-deferred.

You may have to decide on your 401(k) when you move jobs. Each choice has benefits and drawbacks.

You should keep your old 401(k) plan in place if you have a sizable amount of savings. You can leave it in your previous employer’s plan or transfer it to your new employer’s 401(k) plan.

Although it may be tempting, taking a 401(k) distribution before age 59 or 1/2 may result in a penalty. Additionally, it decreases your retirement fund.

The simplest way to transfer your retirement funds when you change jobs is by rolling over a 401(k). You need to call your former workplace’s 401(k) provider and request that they move your account directly into their plan. Typically, this process is simple and quick.

Before deciding whether or not to roll over your 401(k), you should consider the types of investments your former employer offers, the fees they charge, and the vesting choices for their matching money.

Two basic alternatives for rolling over your 401(k) are Direct Rollover and Indirect Rollover. (60-day rollover).

Your former company will issue you a cheque for the amount of the direct rollover that is made payable to you and does not have any tax withholdings. If you are under the age of 59 12 or owe federal taxes on the money you get from your former employer, there might be better options than this one.

Transferring your 401(k) money to an IRA is one of the most intelligent decisions when switching employment. You can avoid taxes and early withdrawal fees by choosing this option.

You will lose part of the tax-deferred growth on your investments if you move your 401(k) money to an IRA, but that is the only drawback. However, having more important objectives, like paying for education or significant life events, can be worthwhile.

While most businesses only provide a small selection of investment alternatives in their 401k plans, rolling your money into an IRA may allow you more investment freedom and reduced fees.

You should consult a financial adviser or a CPA before choosing to ensure that your alternatives are the best ones for you. Also, remember that IRAs require you to wait until age 59 1/2 before you can receive a distribution, whereas 401ks enable you to access your money without penalty up to age 55 (unless you’re still working).

Even though changing jobs can be stressful, it’s crucial to remember what you should do with your 401(k). Making the appropriate choice may maximize your savings, minimize tax liability, and keep your nest egg expanding.

Participants in 401(k) plans have various options available when they quit their jobs, including cashing out. However, because it can dramatically lower your retirement funds, this is only sometimes a wise choice.

In reality, the United States is one of a select few industrialized nations that permits businesses to offer cash-out choices to departing employees.

When an employer wants to convince workers to cash out their 401(k) balance, they send them a standard letter encouraging them to consider the possibility. This transforms an emotionally unmovable source of retirement security into a ready supply of income.

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Skip West

Skip West was birthed in Greenville, South Carolina, but he relocated to Arkansas as an adult.