What Happens to Your 401(k) After Leaving Your Job?

“Set it and forget it” does not mean completely forget it. If you have been meaning to do something about your 401(k) from your old job, you are not alone. Over the span of an entire career, a person can change jobs more than you might think.  That’s a new job, on average, every 2.9 years, which could mean many different employee-sponsored retirement accounts. Your old plan might not be top of mind in the middle of a career move, but it is important to keep track of your hard-earned assets.

Top Takeaways:

  • Know the different options available for your 401(k) after you leave your job.
  • Understand the difference between a rollover IRA and a rollover 401(k)—including the pros and cons of each.
  • Learn how tax-deferred investing offers greater growth potential.
  • Know your maximum annual contributions.
  • See how Howland Capital can help you plan and save for retirement.

401(k) Options After You Leave Your Job

Rest assured, you have options for dealing with your old 401(k) when you leave your job. What is best for you will depend on your unique circumstances. What are your options?

Option 1: Leave it with your former employer

If your former employer’s plan permits it, the easiest thing to do is leave it where it is. Easiest, however, does not necessarily mean best. Keep in mind that having multiple 401(k)s may make it more challenging to get an overall sense of where you stand with your retirement investment goals. It can become a managerial headache, and your old employer may charge your account additional fees if you leave it there.

Option 2: Roll it into your new 401(k)

If your current employer offers an employer-sponsored 401(k), you can roll over the assets in your old account into a new 401(k) account. Doing so would enable you to continue taking advantage of tax-deferred investing as well as any employer matching of current contributions. You would also have a more consolidated view of your retirement assets.

Option 3: Roll it into an IRA

If your new employer does not offer a 401(k), or does offer a 401(k) but does not offer the option of transferring 401(k) assets from a former employer into the plan or if you have many accounts you want to consolidate, you may want to consider rolling your 401(k)(s) into an IRA. This is a relatively simple process that allows you to keep your assets tax-deferred and can give you a wider range of investment options from which to choose.

Option 4: Take a lump sum distribution

You could cash out your 401(k) and take a lump sum distribution, but unless you are over 59 1/2, keep in mind that you would incur a 10% early withdrawal penalty on top of taxes. Unless you really need (not just want) the money, this is not a good option.

Rollover IRA vs 401(k) Rollover

If you are deciding between transferring your retirement assets into a rollover IRA or the 401(k) plan of a new employer, much depends on individual circumstances and preferences. Again, if you have multiple 401(k)s, rolling them into an IRA or a current employer’s 401(k) would enable you to consolidate your retirement assets.

You should compare the fees in your former employer’s 401(k) plan versus what they would be in an IRA.  You should also assess the likelihood of your needing to withdraw money before you retire.  While we don’t recommend it, as they say, “life happens.”  IRAs offer the opportunity to withdraw money penalty-free for certain needs.  401(k)s offer the opportunity to take a penalty-free loan (as long as you repay the funds).  Most employers do not offer this benefit to former employees, however.

What If You Have Not Started Saving or Think You Are Not Saving Enough?

Three out of four Americans have not sufficiently saved for retirement, according to a recent study by the Federal Reserve Bank of Chicago.2 If you are one of the 75% of Americans who have underfunded their retirement, do not wait to do something about it. How long you invest is just as important as how much you invest. Time is typically your greatest ally when investing, and tax-deferred investments offer even greater growth potential.

Know Your Limits

There is an annual limit on how much you can invest on a tax-deferred basis. In 2023, the limit for a 401(k) is $22,500 (excluding employer contributions). Employees 50 and older can contribute an extra $7,500 without penalty in what is known as a catch-up contribution. For an IRA in 2023, the annual contribution limit is $6,500, with an additional $1,000 catch-up (total of $7,500) if you are over 50.  As of this writing, catch-up contributions will no longer be tax-deductible for those with wage income exceeding $146,000 in a given year.  Those in this category can continue to make catch-up contributions, but those contributions are required to be after-tax and will be placed in a Roth IRA or Roth 401(k).

A Note on Inflation

For nearly four decades, inflation in the US has been low. More recently, however, inflation has risen, which makes cash less attractive. Inflation can quickly erode purchasing power.  Historically, investing in the stock market has offered the best protection against inflation.  Inflation provides one more reason to put any cash not needed in the near term into a retirement plan.

Retirement Plan Refresher

A 401(k) is a company-sponsored retirement account. Individual employees contribute income that is typically withdrawn directly from the employee’s paycheck and can be matched by employers.  Investments grow tax-free until funds are withdrawn.  Investment choices are limited to what is curated by the plan administrator —typically mutual funds and ETFs.  A 403(b) account is similar to a 401(k) account, except that it is offered at a non-profit institution such as a school or hospital.

An Individual Retirement Account (IRA) is a retirement savings vehicle that can be set up by an individual or a financial institution. Your investments also grow tax-free until funds are withdrawn. If you are still working, keep in mind that there is no employer match with an IRA, but an IRA may offer you a wider selection of investment options. Contribution limits for 401(k)s are higher than those for IRAs, but you can contribute to both if you so choose.

Traditional and Roth are two distinct types of investment options for 401(k)s as well as IRAs. In a traditional IRA or 401(k), assets are invested on a pre-tax basis and taxed when you take withdrawals. In a Roth IRA or 401(k), assets are invested on an after-tax basis, and you do not pay income tax when money is withdrawn.

Howland Capital Can Help You Plan and Save for Your Retirement

No matter how many years until your retirement, Howland Capital can work with you to develop and tailor a retirement plan that meets your unique needs. We can help you locate and manage old or abandoned retirement assets, set goals, and determine an appropriate investment strategy.

For more information, speak with a Howland Capital financial adviser.

  1. Source: Bureau of Labor Statistics, Economic News Release, Number of Jobs, Labor Market Experience, Marital Status, and Health: Results from a National Longitudinal Survey Summary, August 31, 2021. Most Recent Data Available.
  2. Source: Federal Reserve Bank of Chicago, Retirement Savings Adequacy in US Defined Contribution Plans, February 2020.

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