When you’re changing jobs, it’s crucial to understand how your employment choices can affect your retirement — especially when it comes to your employer-based retirement plans. What happens to your 401(k) when you leave a job? Do you take the money with you or leave it in that account? Should you move the money into an individual retirement account (IRA)? There are several options, and each one offers unique benefits and disadvantages.
Figuring out what to do with an old 401(k) requires you to evaluate each choice based on your retirement goals. It’s also essential to understand how each option affects your taxes and ability to access the funds. Read on to learn what choices you have when it comes to a 401(k) from an employer you no longer work for.
401(k) Option 1: Leave It With Your Old Employer
The easiest option is to just leave your 401(k) account with your old employer. Although there are a few companies that won’t allow you to do this, it’s a viable option for most employers.
With this approach, you don’t really have to do anything until you’re ready to retire. Your money just stays in that 401(k) until you retire, and then you can start to access it according to the terms of the plan.
While this choice is the simplest, it might not be right for everyone. If you choose this option every time you switch jobs, you may end up with multiple 401(k) accounts when you retire, which can be needlessly complicated. If you want to have a little more control over your funds and/or avoid dealing with multiple retirement accounts, you can roll the money into your current 401(k) or an IRA.
401(k) Option 2: Roll It Into Your New 401(k)
Although leaving your 401(k) with your old employer is the simplest option, this one is usually pretty easy as well. When you start working for your new employer, they should give you the option to roll the money from your old 401(k) into your new 401(k).
This route can offer several benefits. There aren’t any negative tax implications, so you don’t have to worry about that. Additionally, it keeps all your retirement money in a single 401(k), so you don’t have to deal with multiple accounts.
However, not all employer-backed 401(k) accounts are equal in terms of investment options. One of the hallmarks of this type of retirement account is that it’s managed by your employer. That means you don’t have as much control over how your money is invested.
Before you decide to roll over your old 401(k) into your new one, it’s a good idea to compare them to see which one offers the best investment opportunities. You might find that your old employer’s 401(k) investments are better, so it might make more sense to just leave the money in that account.
401(k) Option 3: Move It Into an IRA
You also don’t have to keep your money in a 401(k) account at all! When you leave your job, you also have the chance to move the money from the old 401(k) account into an individual retirement account.
This type of account isn’t managed by your employer, so you have a bigger variety of investment options and more control over how the money is invested. If you have an IRA, you can choose to have a financial advisor manage it. This setup eliminates the hassle of personally managing the investments but also allows you access to a wider range of opportunities, which can lead to a better ROI on your retirement investments.
If you have an IRA, you can move all your old 401(k) accounts into it. You don’t have to worry about multiple retirement accounts. Just roll the money over into the IRA whenever you switch jobs and allow your financial advisor to manage the investments for you. This approach is fairly simple and also gives you a few more options for your investments.
Top 401(k) Considerations
There are pros and cons to every option: leaving your money in your old 401(k), rolling it into your new 401(k), or moving it into an IRA. Leaving it alone is the simplest option right now, but it can be complicated later once you retire if you have money in several different 401(k) accounts.
Rolling the money into a new 401(k) is also fairly simple, but the investment options with your new employer might not be as good as those you had with your old employer. In either case, leaving the money in a 401(k) doesn’t give you as much control over your investment options as moving it into an IRA.
However, there is one significant downside of an IRA. Your 401k likely provides more creditor protection than your IRA does. This is decided state by state so there’s not one uniform rule, but in general 401ks will provide better creditor protection.
Contributing to Your 401(k) Is What Matters Most
Figuring out what to do with an old 401(k) can be challenging because there are a few different options. You can either let the account stay with your old employer or roll the money over into a new 401(k) or IRA. Each option has pros and cons, but deciding what to do with your 401(k) matters far less than the most important thing: contributing to it.
Contributing to your 401(k) is crucial. This type of employer-backed account allows you to save for retirement and lower your tax liability. Plus, most employers offer to match some of your contributions, so it’s like getting free retirement money. So no matter what you decide to do with 401(k) accounts from old employers, make sure you’re contributing to your plan at your current job.
An experienced financial planner can help you navigate all the complexities of retirement planning. They can break down all the options you have when it comes to your 401(k) and show you how each one fits into your overall financial situation. If you’re ready to work with a financial planner who will prioritize your goals and values, schedule a consultation with the Guiding Wealth team today.