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Posted on November 25, 2019

401(k) Options When Leaving Your Employer

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Published by Jake Dungey

 

You’ve come to the point where it’s time to separate service from your employer and being the type of person that wanted to be prepared for your financial future, had decided to participate in the company 401(k) plan. Now you’re thinking, “what options do I have with this money?”.

There are usually three options that are universal across 401(k) plans and those are what we’ll look at. Of course, you’ll want to check with either your HR department or the company that holds the 401(k) to verify what your options are, but these are usually safe bets as far as available options go.

Roll the Money Into Another Qualified Account

Whether you’re leaving your employer because you found another job, you’re retiring or life circumstances have caused you to leave the workforce, we usually tell people that the three best words you can remember when you leave your employer is, “rollover, rollover, rollover!”

If you’re going to another employer and they offer a retirement plan, you more than likely must meet some sort of eligibility requirement before you can put money in. While you may not be able to contribute to the new plan right away, most plans tend to accept rollovers from old retirement accounts. Ask your new employer if this is the case, and, if so, what you need to do to get your money into the new plan.  Since your next employer will most likely offer a plan, here is a great article  that will help you take your 401k to the next level.

If your new employer doesn’t have a retirement plan, doesn’t accept rollovers, or you’re not staying in the workforce, you can open an IRA and roll your old retirement plan into that account as well. It’s important to note that, if done properly, a rollover into another qualified retirement account should not cause what’s called a “taxable event.” Meaning, you won’t owe taxes on any of the money you move into either the new retirement plan or IRA, assuming it’s all pre-tax money.

Leave the Money Where It Is

Most plans allow you to keep your money in your old employer’s plan, even if you no longer work there. However, you usually need to have a minimum balance to remain in the plan, typically $1,000, but you can stay in the plan and allow your money to stay invested as it was when you were working to continue to hopefully grow as time goes by.

You won’t be able to contribute more money into your account with your old employer, and most employers don’t want former employees to stay in the plan due to administration costs, but you can inquire as to what the minimum account balance is before you can no longer be “forced out”.

Cash out

This is the option we try to get people to avoid unless absolutely necessary. You can choose to cash out your account when you leave your employer, regardless of your account balance. If you have $100 or $1,000,000 you can take all the money that you’re entitled to.

This option does carry with it some implications. First, we all know that Uncle Sam always gets his cut. If you have yet to pay taxes on any portion of your account balance, once you cash out you’ll owe the government any applicable taxes. This may also push you into a higher tax bracket and then you may owe even more to the government come April 15th.

Second, we as human beings tend to spend money that we have on hand and that is easily accessible; that’s why there are hurdles in place that make it difficult to access money deposited into retirement accounts. If you suddenly have $50,000 deposited into your bank account, you may be tempted to take that vacation you’ve dreamed of, make the renovations on your home you’ve always wanted or buy that new car you’ve had your eye on. Doing this can set people back on their path to retirement.

Finally, you may not have a choice if you get cashed out. As we discussed above, if your account balance is under a certain threshold, usually $1,000, your employer may “force out” your money and you’ll receive a check in the mail. In this instance, you can still deposit the money into an IRA within 60 days and do what’s called a “60-day rollover,” but those increase the margin for error and you may still end up with a taxable event.

So, there you have three options as to what you can do when it comes time to leave your employer. As always, not all these options are applicable to everyone, as each person’s situation is unique to them. If you have questions on what you should do, give us a call and we’re more than happy to help you decide what’s best for you and your individual situation.

 

Before rolling over your retirement account, consider all available options, which include remaining with your current retirement plan, rolling over into a new employer’s plan or IRA, or cashing out the account value. When deciding between an employer-sponsored plan and IRA, there may be important differences to consider – such as range of investment options, fees and expenses, availability of services, and distribution rules (including differences in applicable taxes and penalties). Depending on your plan’s investment options, in some cases, the investment management fees associated with your plan’s investment options may be lower than similar investment options offered outside the plan.
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