What Happens to Your 401(k) When You Quit?
Planning your retirement is a crucial aspect of financial management. One of the most common retirement savings vehicles is a 401(k) plan. This employer-sponsored retirement account offers tax advantages and allows you to contribute a portion of your salary toward long-term savings. However, many wonder what happens to their hard-earned 401(k) funds when they leave their job. In this blog post, we will explore the options available to individuals when they quit their job and how they can maximize their 401(k) savings.
Leave Your 401(k) With Your Former Employer.
When you leave your job, you can leave your 401(k) account with your former employer. This choice keeps your retirement savings intact, and you can continue to benefit from any investment growth. However, 401(k) plan contributions go through payroll. Thus, you cannot continue contributing to your 401(k) through a former employer since you will no longer be on their payroll.
Another critical factor in deciding what to do with your 401(k) assets is that not all employers allow terminated employees to leave funds in their 401(k) plan. Retirement plans can have a provision that forces out terminated employees with an account balance below a certain threshold. Generally, when a 401(k) plan has this provision, employees will receive a notice of their options. If they don't select an option within a given time frame, their account balances will automatically move to an IRA in their name. Or, if the account balance is below a certain amount, they may have their account cashed out.
A typical setup is for terminated employees to automatically have their funds rolled to an IRA if their account balance is below $5,000. Moving from the 401(k) to an IRA is not a taxable event. It is common for this setup to have former employees with an account balance below $1,000 have a check mailed to them for the total account balance.
Check with your HR department, financial advisor, or plan administrator to understand the specific rules and fees associated with leaving your 401(k) with your former employer.
Roll Over Your 401(k) Into a New Employer’s Plan.
If you secure a new job that offers a retirement plan, you may have the option of rolling over your existing 401(k) funds into the new 401(k) plan. This consolidation simplifies your retirement savings strategy and allows you to continue contributing to your account. Rolling over your funds also maintains the tax-deferred status of your savings, ensuring that you won't incur any immediate tax liabilities.
This option is popular because it simplifies things by keeping all your retirement funds in one place. However, when comparing this option to leaving funds with a previous employee, you should consider two things.
Fees
Often, retirement plans have fees passed along to participants and deducted from their accounts automatically. You can request a fee disclosure from your former employer to see how costs compare to your new 401(k) plan.
Investment Options
When you move funds into a 401(k) plan, you are limited to the options available in the 401(k) plan. If the investment options are not competitive or generally poor, rolling funds into the new employer's 401(k) plan may not make sense.
Roll Over Your 401(k) Into an Individual Retirement Account (IRA)
Another alternative when you quit your job is to roll over your 401(k) assets into an Individual Retirement Account (IRA). This option provides more control over your investments, as you can choose from various options. Additionally, IRAs often offer greater flexibility regarding withdrawals and beneficiary designations.
Rolling your 401(k) into an IRA can be done without triggering a taxable event. As mentioned above, it is important to compare fees. It's worth consulting a financial advisor to determine whether an IRA rollover is right based on your circumstances.
Cash Out Your 401(k)
While it may be tempting to cash out your 401(k) when you leave your job, it is generally not advisable. Cashing out your account before retirement age incurs income taxes and, if you are younger than 59½, a 10% early withdrawal penalty. Moreover, by withdrawing your funds prematurely, you miss out on potential long-term growth and compromise your financial security in retirement.
Do You Lose Your 401(k) if You Get Fired?
While you will lose your ability to contribute to your 401(k) through your former employee, you cannot lose your vested balance when you terminate your employment, regardless of the reasons for termination. The money you put into the 401(k) plan is always yours to keep. There can be a vesting schedule associated with your retirement plan. If there is a vesting schedule, you may have to complete a specific amount of years of service before you can keep the full employer match. Remember that employer match and profit-sharing contributions can have separate vesting schedules.
Here are a few ways to see if you have a vesting schedule on your employer match.
Review the Summary Plan Description (SPD)
This document reviews a retirement plan's main points, including the vesting schedules.
Review your quarterly statement
Sometimes, quarterly statements break down the vesting schedules.
Reach out to your plan administrator
Your plan administrator should have the answers to these questions.
Call customer service
No one likes calling an 800 number, but calling the recordkeeper can help you get the necessary answers. Generally, you can find their number on your quarterly statement.
Conclusion
When you quit your job, making informed decisions regarding your 401(k) savings is crucial. All viable options are leaving your retirement account with your former employer, rolling it over into a new employer's plan or an IRA, or continuing to contribute to your existing account. However, cashing out your 401(k) should be a last resort due to the associated taxes and penalties. Our team of financial advisors can help you navigate your options based on your circumstances. Remember, your 401(k) is a valuable asset that can support your retirement goals, and by making wise choices, you can ensure a more secure and comfortable future.