Managing Your 401(k) During a Job Transition

Considering a job change? Or perhaps you are already in transition with a new employer or actively looking for employment.

You’re certainly not alone. According to the U.S. Department of Labor, the average person will change careers 5-7 times during their working life. Approximately 30% of the total workforce will now change jobs every 12 months.

While a job change may be a relatively stress-free process for some, many others are impacted in a variety of ways, and not always positively. Getting out in front of some of these challenges and tackling them head on, can make a big difference to your well-being and your financial health, specifically. 

Your Retirement Benefits and Transition Options

If you have begun investing in a 401(k) or 403(b) at your previous (or soon to be previous) employer, you have several options in what to do with your account. It’s important to know these options and take the appropriate action so that you’re not leaving tax advantages behind. 

First, it’s important to understand that how much money you have vested in your retirement account may very well impact what decision you make on what to do next.

Less than $7,000 in your plan?

If your 401(k) or 403(b) balance has less than $1,000 vested in it when you leave, your former employer can cash out your account or roll it into an individual retirement account (IRA). This is known as a “de minimus” or “forced plan distribution” IRS rule. In some cases, if your vested balance is between $1,000 and $7,000*, your former employer may also be eligible to perform an automatic rollover to your new employer’s retirement plan.

*After December 31, 2023, the threshold increased from $5,000 to $7,000 for any distributions made due to new retirement plan changes by SECURE Act 2.0.

More than $7,000 in your plan?

If you have over $7,000 vested in your 401(k), 403(b) or other retirement savings plan, there are generally four options for you to manage your retirement savings as you transition from your employer:

• Leave your account with your former employer. If your plan sponsor allows you to keep your retirement savings in their plans after you leave. While your earnings will still grow tax-deferred or tax-free, you won’t be able to contribute additional money to the account, though you can continue to manage your investments. If you do decide to leave your money in your former employer’s plan, keep up with its performance and check that how it’s invested continues to align with your goals. Make sure to verify if your plan requires a distribution at some point in the future.
• Move the money into an IRA. You can open an IRA and move, or roll over, the money in your 401(k) or 403(b) into it. This may have more investment choices than your employer’s plan allowed and let you continue contributing to your retirement account provided you have earned income.
• Move your money into a new employer’s plan. It may be smart to check with your new employer to see if they will accept a rollover from your previous employer’s retirement plan. Managing just one 401(k) plan might be easier. See if your provider can do what’s called a trustee-to-trustee rollover or direct rollover.  With a direct rollover,  your current retirement account administrator will send a check to your new  plan administrator  instead of mailing a check to you, significantly simplifying the rollover process. On the other hand, with an indirect rollover,  your old plan administrator  will send the rollover check made out to you instead of your new plan administrator and will be required to withhold 20% of your balance in taxes, and you only have 60 days to deposit that money into a tax-advantaged retirement account, like a 401(k), or you could face early withdrawal penalties. Direct rollover is also an option for rollover IRAs.
• Withdraw without rolling it over into another tax-advantaged plan. This can be a costly choice since withdrawals of cash are subject to taxes and penalties. Leaving your money in a tax-advantaged retirement account preserves the tax benefits and can help with tax-deferred or tax-free growth potential over time.

What’s right for you?

• The factors in determining what to do with your retirement account after a job change include:
  
  • What investment options are available to you and how do they fit within your long-term retirement goals?
  • What are the tax implications and potential penalties for each option?
  • What are the plan fees for each option?3

Common Rollover Mistakes and How to Avoid Them

1. Not doing it at all. If you leave your 401(k) with your former employer, you’re no longer able to make contributions and this can lead to losing track of how much money is in the account or how it’s performing. You also may not have as many investment options as you would in a more current retirement plan. It’s important to note that there are a few rare instances where it makes sense to leave your plan alone, such as lower fees or unique investment options. 
2. Missing the 60-day deadline. If you take the money out of your old 401(k), including for an indirect rollover (more on that below), you can’t sleep on the process. You have 60 days to get it deposited into a new retirement account — otherwise, the IRS will assume you cashed out and hit you with those taxes, though there are some instances in which the IRS may give some latitude.
3. Making a mistake when doing an indirect rollover. An indirect rollover is when your former plan administrator writes the check to you instead of your new administrator. You now have the burden to make sure you take all appropriate steps in rolling it over into an eligible account within 60 days and for the exact amount, which will now include the 20% your old administrator may have withheld for tax purposes. 
4. Not alerting your new investment company beforehand. No matter what kind of rollover you decide on, it’s smart to open your account with your new account administrator and make sure they know you’re planning to roll your old retirement account over to them. If they’re prepared to receive those funds, it’s more likely the rollover will be handled appropriately.

It’s important to educate yourself about the various options available to you in transitioning a retirement account away from your previous employer. At least as important is to talk with your new plan administrator or your personal financial advisor so that you choose the right option for you and take all the necessary steps to minimize penalties, taxes and fees.