What to Do With 401(k) When Leaving Company

Good morning and happy Halloween! 🎃

Quick newsletter this week answering a reader question so you can get back to your holiday festivities:​

"Hey Treyton, I have a 401(k) but I'm leaving my job soon, what am I supposed to do with it?"

When it comes to 401(k)'s from old employers, there are a few different options on what you can do with them:

Option #1) Leave the 401(k) at your old employer

If you're leaving your job and you have more than $5,000 in the 401(k), you can leave it at that employer and the account will stay invested and continue to grow.

You may decide to leave it because it's less headache to just leave it rather than moving it or maybe because the investments are performing well, but regardless, one of the first things to do with your new employer is to set up your new 401(k).

There are 2 main reasons you want to do this is:

  • So you can start investing again
  • So you can begin to compare your old 401(k) with your new 401(k)

What I mean by the second point is that not all 401(k)'s are equal. They all have different fees and different investment options so after opening a new 401(k), you can compare the fees and investment options between both of them to determine if it makes sense to move the old one to your new employer.

But here are a few scenarios of what may happen with your existing 401(k) depending on the account balance:

  • If you have less an $1,000, the old employer will most likely sell your investments and send you a check for the dollar amount
  • If you have between $1-5,000 and they won't let you leave it at the company, they must help in setting up an IRA to transfer the funds to
  • If you have more than $5,000 invested in your 401(k), most plans allow you to leave the existing account at your old employer

But overall, if you're leaving your job and your existing 401(k) is invested in good funds and they're low cost, it's generally okay to leave it.

But if it's high-cost or you're not a fan of the limited investment options, it may make sense to roll it over to a 401(k) at your new employer or cash out and reinvest into an IRA.

If you decide to roll it over into a new account, there will most likely be additional fees so keep the costs in mind and don't be afraid to ask the HR department, your financial planner, or the 401(k) plan provider questions to make sure you're making the best decision for yourself.

Option #2) Roll the 401(k) over to your new employer

We kind of alluded to this in the first option, but if you decide that you don't want to leave your 401(k) at your old employer, another option is to simply roll it over to your new employer.

You'll first need a 401(k) established at your new employer to do this and again, the HR department is going to be your best friend here. Their job is to help employees understand benefits and explain the different options so they'll be more than happy to help explain the rollover and set up process.

An important note: If rolling over your old 401(k), you have 60 days from the time the old plan releases your funds for them to be deposited into the new 401(k). If not completed within 60 days, you may incur fees and/or penalties.

When transferring and rolling over funds, be sure to frequently check in on the status to ensure that deadlines are being met and the funds are being transferred correctly.​

Option #3) Cash out and reinvest

The last option outside of keeping it at your old employer or transferring it to your new employer is cashing it out and reinvesting it yourself.

You may decide to take the funds and invest them in an IRA because an IRA gives you more flexibility, most likely lower fees, and more investment options.

Whoever you decide to use for your IRA (e.g. TD Ameritrade, Vanguard, Schwab), they will help ensure the funds from the 401(k) are transferred and invested in a timely manner as the 60-day timeframe applies here as well.

Or, if you don't want to invest the money in an IRA, the least prudent option is to simply cash out and keep the money. I'll admit, this is what I did when I left my last job.

But rather than keep the money and spend it on unnecessary things, I kept the money and reinvested it back into my business.

Rather than put the money away into an account I couldn't touch for 40 years, I used the little bit I did have to put towards building Piertree and for entrepreneurial-minded people, I'll be the first to tell you that investing in your business can be the best investment you make throughout your life.

It can provide higher returns than an investment account, but it also comes with much more risk.

But if you're leaving your job to start a business, just know that you can use funds from your existing 401(k) but will most likely have to pay income tax on the funds as well as a 10% penalty.

So in summary, when you're leaving a job and have an existing 401(k) you can either:

  • Leave it at your old employer
  • Roll it over to your new employer
  • Cash out and reinvest into IRA
  • Cash out and use money as desired

This was a quick overview and each option has its own pros and cons and I know it can be confusing so if you have any questions, just send me an email at treyton@piertree.com - I'm here to help!

👻 Spooky Stats

  • 67% of Americans struggle to pay a $1,000 emergency (NORC)
  • Only 24% of millennials have basic financial literacy (NEFE.org)
  • 21% of Americans don’t save anything of their annual income (CNBC)
  • 1 in 3 Americans have saved $0 for retirement (Money.com)
  • 114.4 million Americans said they took out a personal loan in the past year (Finder.com)
  • 8.8 million Americans admit to cheating on their taxes (Finder.com)
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