The Great Resignation and Your 401(k) Plan
People are quitting their jobs in record numbers, and that means many are leaving 401(k)s behind with their old employers.
The “Great Resignation” took over the headlines in 2021 – and the trend doesn’t appear to be going away anytime soon.
The latest Department of Labor statistics show more than 4 million people quit their jobs in December 2021.¹
Additionally, “4.5 million people voluntarily left their positions in November – an ‘all-time high,’ according to the agency responsible for collecting the data. That’s 3% of the nonfarm workforce, which headlines also proclaimed a record level.”²
Interestingly, according to the Harvard Business Review, mid-career 30 – 45 year olds are driving the Great Resignation – with an average increase in resignation rates of more than 20% between 2020 and 2021.³
In early January 2022, ResumeBuilder.com released a report showing one-fourth of workers are looking for a new job this year.⁴
Whether you’ve recently left your job or you’re seriously considering leaving your current one, be sure to pay attention to the 401(k) plan account you’re leaving behind.
While not all employees have a 401(k), those who do should be aware of what happens to their 401(k)s they leave behind – and what options are available to them.
Regardless of how much your 401(k) balance is, it’s important for your financial future to decide on what you’re going to do with it moving forward.
Keep reading to find out what you need to know about leaving behind a 401(k) plan and what options are available to you.
The Cost of Leaving Behind a 401(k)
It’s stressful to leave a job – whether you start a new one right away or not. And, chances are, your 401(k) that’s been left behind is the least of your worries.
Totally understandable. Especially if you think your previous employer is taking care of your old 401(k) for you. (Which they are not. More on that below.)
According to a Capitalize white paper titled The True Cost of Forgotten 401(k) Accounts, by the end of 2020, Americans had accumulated over $6.7 trillion in 401(k) accounts.⁵
Yet, as of May 2021, there were an estimated “24.3 million forgotten 401(k)s holding approximately $1.35 trillion in assets, with another 2.8 million left behind annually.”⁶
That’s a lot of retirement savings left behind.
According to Capitalize, leaving a 401(k) with a past employer, “has the potential to cost an individual almost $700,000 in foregone retirement savings over a lifetime.⁷
While the potential amount you may be missing out on depends on your balance and fees, do you want to risk missing out on savings you worked so hard to accumulate?
401(k) Plan Options When You Leave a Job
There are a few options for 401(k)s when you change jobs:
- Leave the money behind in the former employer’s 401(k) plan.
- Roll over the 401(k) savings into an individual retirement account (IRA).
- Roll over the old 401(k) into a new 401(k) account, if permitted by your new employer.
- Cash out your 401(k).
Before you decide what to do, it’s important to know the irreversible and costly 401(k) rollover mistakes..
Educating yourself before you do anything is the best way to safeguard your money and hard-earned retirement savings from unnecessary penalties and taxes.
Let’s take a look at your options in more detail.
#1 Doing Nothing: Leave It Behind
A common belief with 401(k) investors is that if they leave behind a 401(k), the past employer is taking care of it for them.
They cannot because it’s your money. And your responsibility.
Aside from that, there are several disadvantages to doing so:
- Your account will remain subject to plan rules.
- You will continue to have limited investment options.
- You incur ongoing fees (which could be quite a bit, especially if you’re in a high-fee plan).
- You may have overlapping funds that may not suit your risk tolerance.
- You will have another account to keep up with.
#2 Roll Over Your 401(k) 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.
If you have less than a few thousand saved in your old 401(k), federal regulations allow your old employer to mail you a check.
Be careful here, as getting a check in the mail can trigger federal and state taxes AND a 10% withdrawal penalty if you are under 59½.
You can avoid taxes and penalties if you roll over the funds into your new 401(k) within a 60-day period. This is what’s referred to as an indirect rollover.
It’s important to note that with an indirect rollover, you’ll need to come up with that extra 20% for the tax withholding (you’ll be able to recover the withheld taxes when you file your tax return).
Check out our guide on the 5 irreversible and costly rollover mistakes.
#3 Roll Over Your 401(k) into a New 401(k)
Another option is to roll over your old 401(k) into a new 401(k) account – if permitted by your new employer.
Typically, if you have at least $5,000 saved in your old 401(k), most companies allow you to roll it over.
As mentioned in the section above, if you have a lower amount saved in your old 401(k), the company may mail you a check.
If this happens, you have 60 days to roll it over into your new 401(k) or pay taxes and penalties.
#4 Cash Out Your 401(k)
If the purpose of your 401(k) is to save money for retirement, we highly advise against cashing out an old 401(k) because you may disrupt your retirement by taking it out early.
Also, it can be costly.
If you cash out and you are under 59½, you will have to pay a 10% penalty on top of the taxes. The IRS generally requires an automatic withholding of 20% of your 401(k) for an early withdrawal for taxes.
If you are over 55, there is an “Over 55 Rule” you should be aware of.
This rule states that if you are 55 or over in the calendar year you leave your job, you can take penalty-free withdrawals from that employer’s 401(k) plan. You will still have to pay taxes on the withdrawal, but you can avoid paying penalties.
With your 401(k), you got a tax break for saving the money in the first place because all contributions are pre-tax.
When you cash out of your 401(k) early, all that money you put in – and the gains you made – become taxable as ordinary income.
Sure, you may get some of that back on your next tax return, but, between the penalty and the tax withholding, you can expect to say good-bye to a good chunk of your savings.
The good news is that you have 60 days, should you change your mind and want to indirectly roll over your 401(k) savings.
However, you would have to have the money to put the tax withholding back in as well, and then wait for your tax refund the following year to get that additional money back.
Check out our guide on the 5 irreversible and costly rollover mistakes.
Why Seek Help before You Make Your Move
It’s important to understand all your rollover options before you make a move, and seek professional help.
Each investor’s situation is unique, and speaking with someone who can navigate the rollover process helps you make the best decision possible for your financial future.
Have questions about rolling over your 401(k)? Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors.