If you leave your current job for any reason, consider taking your 401(k) with you, and take good care of it as you do so.
With some solid due diligence and good planning, you can set up your 401(k) plan at your new job. Millions of Americans do the same thing every year, and it’s often a good strategy as long as you take care of business.
Here’s how to manage your 401(k) plan after you quit your job:
— Know your options.
— Prioritize paperwork.
— Don’t take the cash-out option.
— Understand your rollover options.
— Study your new retirement plan options.
— Factor in fees.
[Read: How to Rollover Your 401(k).]
Know Your Options
When you leave your company, you have options when it comes to your 401(k) plan.
“You can leave it where it is, although if you have a balance of less than $5,000, then the company can and may close out your 401(k) and send the funds to you in the form of a check or roll it into an IRA for you,” says Carla Adams, founder of Ametrine Wealth, a financial advisory firm in Lake Orion, Michigan. “Other than that, you can roll it over into an IRA or you can roll it into your new company’s 401(k).”
Leaving the money where it is can be problematic.
“Keeping the funds in your old 401(k), especially with people switching jobs far more frequently than they used to, can lead you to having multiple 401(k) accounts, which makes it hard to keep track of all the accounts,” Adams says.
If you roll your old 401(k) into a new plan, make sure the funds get directly deposited into the new 401(k) or IRA. If the funds are sent via check, deposit the check into your retirement account within 60 days.
“If you fail to do so, you’ll miss the opportunity to roll it over, and it counts as taxable income,” Adams adds. “If you’re under the age of 59 1/2, then you will also be penalized on this ‘early distribution.’ This is also why cashing out your 401(k) is typically not a good idea and why you want to roll the funds into another retirement account.”
Prioritize Paperwork
Documentation management is no luxury when you’re moving a 401(k) plan — it’s a necessity. So make those paperwork tasks a priority.
“Make sure to change the email address associated with the 401(k) from a work email to a personal email,” says Maura Madden, founder at Maura Madden Financial Planning in Seattle. “This will be harder to do once you lose access to the work email.”
Also, review the portion of your employer contributions that are vested.
“The amount you actually get to take with you depends on the employer vesting schedule and your length of employment,” Madden says. “Resolve any issues with human resources prior to leaving the company.”
Next, start researching where you want the money to go.
“Ideally, a new employer will allow you to roll into their 401(k) plan,” Madden says. “If you’re rolling it into an IRA, do the paperwork to establish the new account ahead of time so that it is ready for a rollover.”
Don’t Take the Cash-Out Option
Only cash out your 401(k) plan if you absolutely need the money.
“You’ll pay taxes on any distributions of pretax money,” Madden says. “Additionally, workers under age 59 1/2 will pay a 10% penalty upon any amount withdrawn.”
Directly rolling the money into an IRA or a new company’s plan doesn’t count as a withdrawal, is not a taxable event, and will not result in any penalties. “In doing so, you leave your money growing in a retirement account rather than being tempted to spend it,” Madden adds.
There is one caveat. If a worker is close to retirement, choosing to take a distribution could be an option, especially if that worker is older than 59 1/2. If you decide to retire, taking the distribution can work, although it’s advisable to consult with a financial advisor or trusted certified public accountant before making the call.
[READ: Ways to Avoid 401(k) Fees and Penalties]
Know Your Plan Rollover Options
When you leave an old job for a new one, you generally have two rollover options.
Roll over the 401(k) into a new employer’s plan. “If the individual has a new job with a company that offers a 401(k) plan, they can transfer the funds from the old 401(k) into the new employer’s plan after meeting eligibly requirements for the new plan,” says Joseph Weber, founder and retirement plan specialist at Integrated Financial Solutions PLLC in Tempe, Arizona.
Roll over the 401(k) into an individual retirement account: Savers can roll over their balance into an individual retirement account, or IRA, Weber says.
Rolling over the funds into another 401(k) or an IRA is, in most cases, the better option to avoid taxes and penalties and to continue to allow the investments to grow.
“If you are rolling over your plan into an IRA you manage yourself, then you would want an IRA rollover account,” says Evan Drury, a money manager at U.S. Financial Services based in Fairfield, New Jersey. “You want the ability to be able to move this account into a new 401(k) if it makes sense for you in the future. That can’t be done with a regular IRA or funds in an IRA that were never part of a company plan.”
Know What Investment Options Are Available With a New Employer
New employees are typically provided a menu of options they can choose from during their onboarding process.
To dig further, ask your company benefit representative or the plan advisor for help clarifying what’s available. “It’s probably best to contact the advisor on the plan to review the best investments for you as you want some expert help in staying invested for the long term to get the best results,” Drury says.
Also, don’t be reluctant to ask your new company some key questions when rolling a plan over to a new account. These queries should be at the top of that list, Drury adds.
1. What are the plan’s investment options?
2. Are there low-cost index fund options?
3. What are the fees within the plan and the investments?
4. Do the fees change? When? How?
5. Are Roth contributions allowed?
6. What is the match if any?
[READ: 10 of the Best-Performing 401(k) Funds.]
Factor in Fees
Within a 401(k) plan, it’s the responsibility of the plan sponsor to ensure the fees are not overly expensive.
“In the current 401(k) market environment, most plan funds have a fairly low expense ratio and will not have sales fees,” Madden says. “Index (or passive) funds tend to have smaller expense ratios, though they may have redemption (short-term trading) fees.”
If you opt for an IRA when you move to a new job, “be wary of sales charges and compare different classes of a fund (like A shares, B shares and C shares) to determine which is the most advantageous for (your) situation,” Madden adds.
While your new employer may provide access to a financial advisor to answer any retirement plan questions, relying on your own trusted money management professional is advisable, given the high stakes involved in moving retirement funds from an old employer to a new one.
More from U.S. News
IRA Versus 401(k): Which Is Better?
Factors to Consider Before Cashing Out a 401(k)
Is a 401(k) Worth It in 2023? Pros, Cons and Costs
What Happens to Your 401(k) When You Leave Your Job? originally appeared on usnews.com
Update 10/27/23: This story was published at an earlier date and has been updated with new information.
