What Happens to Your 401(k) After Leaving a Job?
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401(k) plans help employees invest and save for retirement, but each company has a retirement savings plan. In this post, we examine what happens to your 401(k) after leaving a job.
Many American employers offer a 401(k) retirement savings plan with tax benefits.
“Employees that sign up for 401(k) plans allow a portion of their paycheck to deposit tax-free directly into this investment account each pay period,” LinkedIn News reported. “About 31% of employees say they don’t understand their employee benefits, including the retirement savings options offered by their company. One of the most common retirement savings plans is a 401(k), and if you’re not investing in it early, you’ll miss out on long-term wealth.”?
Although some employees invest in their 401(k) plans, not everyone knows what to do with them when they leave a job.?
“There is like $3 trillion left behind in 401(k) plans,” FMI financial advisor Frank Iozzo said, “It's a massive opportunity for people. A staggering amount of people [leave their 401(k) plans behind]. And again, it's just like, ‘Well, I don't have to do anything with it, so I'm just not going to do anything, but it amounts to a lot, especially if you have like five to seven jobs over the course of the years.
“In the midst of a job change, there are just so many other moving pieces that take priority that it is really not high on their list of things to do. You don't necessarily have to do anything with it in some cases. So it just kind of takes the back-burner. Generally speaking, most people don't pay attention to their money.”?
A study conducted by fintech company Capitalize (via Money) revealed almost a fifth of all the money American workers have in retirement accounts is tied up in old plans. The average size of those old accounts is $55,000.
What happens to your 401(k) after leaving a job depends on what you do with it, so it is important to know your options.?
I chatted with Iozzo and AllStreet Wealth co-founder and financial planner Thomas Kopelman to find out more about what happens to your 401(k) after leaving a job.?
What to Do With Your 401(k) When You Leave a Job
You have a few options for what to do with your 401(k) when you leave a job.?
First, find out which company your 401(k) is under and verify how much money is in it.?
“Typically if it is $5,000 or more, the plan will let you keep the balance there and you are not forced to do anything with it,” Iozzo said.?
“You can take that balance and roll it over into your new employer's 401(k) plan. [Or] you can roll it into an individual retirement account, an IRA, that you can manage on your own and do what you want with.”
You should also call the plan sponsor, Iozzo said.?
“Let's say you want to keep it with the plan that it's currently in, you don't have to do anything,” Iozzo said. “It is another account that you still have to manage. So now with your new 401(k) plan, you now still have to manage the old 401(k) plan. You [will] have different fees, different investment options, there are different pros and cons for each one. [It is] more for somebody to manage, which is why most people end up consolidating.”
Kopelman recommends not leaving your 401(k) where it is, even if your old job lets you keep it there.?
“You kind of start to lose some access at times where you might not be able to log in and change your investments,” Kopelman said. “Most of the time they let you leave it there and people forget about it. But, you have the option to roll it into your new 401(k). A lot of times that is the best option. The times where I would say it wouldn't be the best option is if you have a really bad 401(k) with your new work, where all the investments are really expensive.”
If you do roll over your 401(k) into the new 401(k) plan, you still have to call the old plan sponsor to initiate that rollover request, Iozzo said.?
“Sometimes they will send the funds directly to the new 401(k) plan,” Iozzo said. “Sometimes they will send a check directly to you, and then you have 60 days to deposit that check to the new plan. In most cases it is direct, but there are the off-chances that it goes directly to you.”?
You need to take certain steps If you roll your old 401(k) money into an IRA.?
“This time you have to create the IRA first,” Iozzo said. “You have an account number to attach to the transfer, the rollover call, the old plan sponsor, request the rollover to the new account. Sometimes it is directly to the new account, sometimes it is to you and then you have to make the deposit. It just really depends on the plan sponsor.”?
Rolling your money into an IRA can have consequences, so you have to do it in a certain way, Kopelman said.?
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“Typically you can find a little bit lower fee investments than a 401(k), but if you are a high-income person …you want to do what is called a backdoor Roth,” Kopelman said. “You basically don't want to roll it into an IRA because then it will basically create a tax liability.”
Finally, you could cash out your 401(k), but Kopelman recommended not doing that.?
“What people have to realize is that you don't really want to cash it out unless you are in a dire situation, because you are going to pay a 10% penalty for early withdrawal,” Kopelman said. “You are not supposed to take it out until you are 59 1/2 and then you are going to pay your income rate.?
“So let's say you're in the 22% tax bracket, 10% penalty. You are going to lose a third ($16,000) of the value that you have there. Plus let's say you had $50,000. Think of how many years it is going to take you to get back to $50,000. It [will] set you back quite a bit to do that.”
How to Find an Old 401(k) After You’ve Left a Job
The best thing you can do to prevent tracking down old 401(k)s is to move it as soon as you leave an old job.
“There are people by the time they're 40 that have 10 jobs,” Kopelman said. “That is a lot of things to remember and find. So I always recommend every time that you leave a job to move it over, just purely for simplification purposes at the least for an organization as well.”
Also, pay attention to the mail you receive when trying to track down an old 401(k), Iozzo said.
“Each of these plan sponsors is responsible for sending you at least an annual kind of statement for any account that's in your name, so don't discount anything that is coming in through the mail,” Iozzo said.?
You can also search for your 401(k) online.?
“There is a national registry (https://unclaimedretirementbenefits.com/) for people to search by social security number [to find out if there are any kind of left behind assets],” Iozzo said.
Consider Consulting a Financial Advisor if You Roll Over Your 401(k)
Talking to a financial advisor helps you understand your investments.
“401(k)s are different than individual investment accounts,” Kopelman said. “Because if I go to Fidelity and open an investment account, I can invest in anything in the world, but in 401(k)s, you are only able to invest in certain funds that your 401(k) has. Everybody's 401 (k) is different.”?
Seeking guidance from a financial advisor is also beneficial because most employees tend to take the default investment option, Iozzo said.?
“It is typically like a target date fund, which is fine,” Iozzo said. “It is kind of like a do-it-for-me solution. If you really want something more customized, a financial advisor will be able to tell you the individual fund options that make the most sense. So it is really built for [you] instead of something that is cookie cutter for a lot of people.”
Some employers have a third-party advisor assigned to the 401(k) plan, so check to see if they do and if they offer a consultation to give you some perspective on how you should invest, Iozzo said.?
“When you're switching jobs due to like increased income, it is a good time to reach out to an advisor, but there are plenty of hourly advisors that you could pay $250 or $500 to sit down with and then walk you through what to do, what your new investment should be and all of that stuff,” Kopelman said. “If you don't know, that is definitely a good thing to do.”
Saving for retirement is critical, but figuring out what to do with your 401(k) after you leave a job doesn’t have to be complicated. You can roll over your old 401(k) into your new one, transfer the funds to an IRA, or cash it out if needed. Consider consulting a financial advisor if you need investment advice for your retirement plan.?
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What happens to your 401(k) after leaving a job?