I Changed Jobs. What Should I Do with My 401(k) Account?
It’s not uncommon for investors to change jobs and not know what to do with their 401(k) accounts, so they do nothing and leave it behind.
Often, 401(k)s are left behind with old employers due to the misconception that the old employer is taking care of it for the former employee.
This is not true. It’s up to you to manage your 401(k). It’s your account and your money.
Leaving your 401(k) account behind with an old employer may be costing you more retirement income and potentially preventing you from reaching your retirement goals.
Why It Is Disadvantageous to Leave Behind a 401(k)
If you leave your 401(k) account behind with your past employer, you run the risk of losing out on better retirement savings or facing penalties.
Whether you have one 401(k) account you left with a past employer or have two or three of them, leaving them behind may result in overlapping funds that may not suit your tolerance for risk.
While you may be able to leave your 401(k) account with your previous employer, there are several disadvantages to doing so:
- Your account will remain subject to plan rules.
- You may continue to have limited investment options.
- You will have another account to keep up with.
The Real Cost of Leaving a 401(k) Behind
If you don’t want to deal with rolling over your 401(k) account, you may want to think again.
Here’s something that happened to a client of one of our Maneuver advisors:
Susan’s past employer had a plan through JP Morgan Chase. Since she left the company, they decided to switch to Fidelity because they offered a better plan.
Because of the way the plan documents were written, Fidelity could not invest one dollar of Susan’s money because they didn’t have an agreement with her since she was no longer employed with the company.
Susan had left her past employer 10 years ago, and it was 9 years since her old company switched plans.
So, Susan’s money just sat.
Remember, because of the way the new plan documents were written, the new company could not invest the funds for past employees.
So, unless Susan rolled over her old 401(k) into a new 401(k) or into another investment such as a personal IRA, the money would not earn interest or grow as Susan expected it to.
Assuming her past employer was taking care of her 401(k) for her, Susan didn’t roll it over. Didn’t touch it. Didn’t really think about her investments.
That’s 9 years Susan’s retirement money sat in cash.
For example sake, let’s say Susan had $50,000 invested in her 401(k) when she left her past employer 10 years ago.
Assume she could have earned an average 6% return on that investment each year for the past 10 years.
On her $50,000 invested, assuming she didn’t invest any more money, she might have earned an additional $39,542.38 over the 10-year period had that money been invested in a 401(k) and not been in cash.
Susan isn’t alone. This is something that happens to too many investors who leave their 401(k)s sitting with their old employers.
Roll Over Your 401(k)
Rather than leaving your 401(k) with a past employer, a better option would be to roll it over into your new employer’s 401(k) plan, providing it’s allowed, or roll it into an IRA.
There are potential advantages to rolling over your old 401(k) into an IRA:
- You can consolidate more than one 401(k) account into an IRA.
- With the right advisor, you have virtually unlimited investment options and more control over the account.
- Tax withholding is not required if you need a distribution.
- You have more control over naming or changing your beneficiaries.
To avoid costly 401(k) rollover mistakes, we recommend seeking expert third-party advice.
Types of 401(k) Rollovers
Before you roll over your 401(k), you need to understand the two types of rollovers: direct and indirect.
- Direct Rollover: When you transfer your money from one retirement account directly into another. With a direct rollover into your new employer’s 401(k) plan or into your IRA, you never touch the money, and no money is withheld for taxes.
- Indirect Rollover: When your 401(k) account funds are given to you via check for deposit into a personal account, with the intention of reinvesting those funds into a new retirement account within 60 days or less.
Indirect rollovers come with stipulations and penalties:
- Your company will automatically withhold 20% for income taxes for indirect rollovers, and then send you the remaining funds via check. You must deposit those funds into a new IRA within 60 days; otherwise, you may have to pay penalties.
- If you deposit the money into a new IRA within the 60-day grace period, you still have to come up with the 20% that was withheld for taxes.
- In most cases, if you are not yet 59½ and you do an indirect rollover, you will also have to pay a 10% early withdrawal penalty. Remember, the IRS gives 60 days to redeposit the funds into an IRA account before early withdrawal penalties apply.
- The IRS only allows one indirect rollover in a 12-month period.
- You cannot split the transfer among multiple accounts. The transfer must come from one account to another account.
Most financial and tax advisors recommend investors opt for the direct rollover option to avoid withholding taxes and potential penalties.
However, we advise you to check with your financial advisor and accountant before you make the move.
Avoid 5 irreversible and costly 401(k) rollover mistakes. Check out our free guide today .