Not Rolling Over Your 401(k) From a Former Employer Could Cost You. Here’s Why

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If you find yourself leaving a job where you were actively participating in a 401(k), chances are you’re not sure what to do with it, and that could cost you. When you leave a job, you have a few options about what you can do with your 401(k). You can leave it where it is and risk the chance of forgetting about it and misplacing it, cash it out (which experts agree is a bad idea), transfer to your new job’s 401(k) plan (if there is one), or roll it over into an individual retirement account, or IRA. 

Experts agree that you should never cash out your 401(k) before retirement age because you run the risk of not being on track for your golden years, not to mention you’ll get hit with taxes and penalties. Instead you should do one of two things: roll over your old 401(k) to your new job’s 401(k) plan, or roll it over to an IRA. Doing either of these will put your money in one spot and give you the option to increase your investment options. 

But whatever you do, don’t leave that 401(k) behind. Read on to learn the pros and cons of a 401(k) rollover and why you should consider moving it when you leave jobs.

What Is a 401(k)? 

A 401(k) is a retirement savings plan offered by employers that allows workers to defer a portion of their paycheck into a long-term investment account. Some employers match a portion of contributions, while others just provide the 401(k) accounts themselves. By investing your money, you let it grow through the power of compound interest. A 401(k) is just a handful of tax-advantaged retirement savings vehicles available. Other options include an IRA for self-managed retirement savings, a 403(b) for public school employees and tax-exempt organizations, a 457(b) for state and local government employees and some non-profit employees, and a TSP for federal government employees.

What Is a 401(k) Rollover?

A 401(k) rollover is when you move the assets you accumulated in a previous employer’s 401(k) plan into a new employer’s 401(k) or into a traditional IRA. It’s something you want to take advantage of when you leave your job. “By rolling over your old 401(k) assets, you can keep your retirement savings all in one place,” says Amy Richardson, CFP, Senior Manager and Financial Planner at Schwab Intelligent Portfolios Premium.

Moving your old 401(k) over helps keep your money in one place. Rather than have many different retirement accounts spread out everywhere, you can keep all your retirement money in one account. It makes it easier to keep track of. It also means you can avoid paying fees or charges twice, if both accounts charge them.

It also helps increase investment choices and ownership. Even if you don’t move your 401(k) to your new employer, you can roll it over to an IRA. This gives you more ownership of your own account regardless of what happens with your new employer. If you ever leave in the future, your traditional or Roth IRA can stay with you.

What Happens to Your 401(k) When You Leave a Job?

Essentially, nothing happens to your 401(k) when you leave a job as it doesn’t automatically come with you to the next place. But you’ll not be able to make new contributions or access many investment choices. 

Pro Tip

Roll over your 401(k) into your new employer’s plan or get an individual retirement account. Leaving your retirement account behind means you’re missing out on money that belongs to you.

“When you leave your job, your 401(k) plan stays as it is unless you choose to roll it over,” Richardson says. “Keeping your plan with your former employer means the account remains subject to that employer’s plan rules, including investment choices and withdrawal options.”

Experts recommend staying away from cashing it out completely if you’re under retirement age, as this will hurt your ability to retire later on. Plus, you’ll get hit with a 10% tax penalty and other fees.

“When you leave a job, any of the vested money in your 401(k) belongs to you,” says Brandon Renfro, PhD, CFP and Founder of Belonging Wealth Management. “You can withdraw that in cash, but you’ll have to pay taxes and a 10% penalty if you are under 59 and a half. With a rollover, on the other hand, you can move that money into another retirement account without incurring any taxes or penalties and let it continue to grow.”

Should You Roll Over Your 401(k) From an Old Job?

If your new job doesn’t offer a 401(k) plan, you might have to move your old 401(k) to an IRA. While similar, IRAs and 401(k)s don’t have the same rules and requirements, but you’ll be able to invest your money in a large amount of investment choices. 

Steps To Roll Over Your 401(k)

Before you can roll over your 401(k), you’ll need to open an account to roll it into. Consider your options, like your new employer’s 401(k) or an IRA.

  1. Open an account. Talk to your new employer about your 401(k) options and they can help you move your account over. “Not all 401(k)s accept rollovers from outside 401(k)s, so that is an important question to ask up front,” Richardson says. If they don’t offer an employer-sponsored plan, find an IRA through any online brokerage or robo-advisor.
  2. Move over your funds. “You want to make sure the funds are deposited directly into your rollover IRA to avoid tax implications,” Richardson says. If the funds are sent to you and not your plan, you could face the 10% tax penalty for early withdrawal. Make sure the money is deposited and out of your hands.
  3. Close the old account. Once you’ve moved over your old 401(k), you can close your old account with your former employer. If there’s anything you’re unsure about, contact your old plan administrator to help you with these steps.