A Quick Throwback

The other day, I overheard a Mom joke that her middle school child was talking about the 1980’s and referring to it as the “late 1900’s”. I suppose it is. But it made me laugh to think about calling the 80’s or 90’s anything BUT the 80’s or 90’s.

But it got me thinking: back then, your parents (or mine) often stayed with one employer for life. Pension plans were the norm, and loyalty was rewarded with a set retirement benefit.

Fast forward to today, job hopping is common and frankly beneficial for income growth. In fact, research has shown that on average, you are able to better negotiate an increase to your salary by up to 10-20% by simply changing employment to another company. Now, instead of pensions, we’ve got 401Ks. 

But here’s the question that stumps so many people:

What happens to your old 401(k) when you leave a job?

First Things First: Your 401K Is Yours

The good news? A 401K is in your name, not your employer’s. Even when you leave, that money is still yours. But you won’t be able to contribute anymore or get employer matches because it’s tied specifically to your employer plan. 

So, what should you do with it? Let’s walk through the main options.

Step 1: Understand the Basics Before You Leave

The 401K Plan Documents will provide you with an understanding of almost everything you need to know as it relates to the 401K plan and how you would be impacted should you decide to leave the company.

If the plan documents do not specifically answer your questions you may have access to someone in HR or you could call the brokerage firm directly where your 401K is held to ask about fees or investment options.

Here are a few things I would want to know and understand before my last day at the company:

1. Check the Vesting Schedule

Employer contributions may be tied to a vesting schedule. That means you don’t fully own your employer’s match until you’ve been there a certain number of years. Your contributions are always yours, but employer dollars might be forfeited if you leave too soon (the golden handcuffs working their magic!). 

2. Ask if You Can Leave It Where It Is

Some employers let you keep your old 401K in their plan, leaving it invested as it was and continuing to grow on your behalf. But if your balance is under $5,000, they might require you to move it.

3. Know the Fees

Employer 401K plans sometimes have higher fees than what you’d pay in an IRA or in your new employer’s 401K plan. Know the cost before deciding to leave your money behind.
After you understand the above, then feel free to leave!

Step 2: Your 401(k) Options After Leaving a Job

Here are your four main choices:

Option 1: Leave It in Your Former Employer’s Plan

• Pros: Simple, no immediate action required. Your money stays invested.
  
• Cons: No new contributions. Limited investment options. Higher fees possible. You might forget about it in the future (hard to believe but it happens ALL of the time). 

Option 2: Roll It Into Your New Employer’s 401K

• Pros: Keeps your retirement savings consolidated in one place. Easy to track. Continues growing tax deferred or tax free depending on the type of 401K (Roth vs Traditional).
  
• Cons: Only possible if your new employer allows rollovers. Investment choices may still be limited and you’ll have to be cognizant of fees for the new plan.

Personally, I love simplicity. One retirement account > juggling five different logins.

Option 3: Roll It Into an IRA

This is one of the most popular routes. Here’s how it breaks down:

• Traditional 401K → Traditional IRA: No taxes due (pre-tax to pre-tax).
  
• Roth 401K → Roth IRA: No taxes due (after-tax to after-tax).
  
• Traditional 401K → Roth IRA: Taxable event. You’ll owe income tax on the rollover amount, sometimes worth it, but certainly not for everyone.
  
• Pros: More control, usually lower fees, more investment options, and can be held at same institution as all your other investment accounts for simplicity.
  
• Cons: Have multiple retirement accounts and having to manage multiple logins. And for some, having to manage the funds and investments on your own. 

Option 4: Cash Out (Last Resort)

• Pros: Quick access to money.
  
• Cons: Pretty significant downsides like income tax, 10% penalty if under age 59 ½, and lost growth potential.

Unless it’s a true emergency, I wouldn’t recommend this one.

Step 3: Be Smart With the Rollover Process

If you’re moving your money:

• Always choose a direct rollover (money goes straight from old plan to new one).
  
• Avoid indirect rollovers (where the check is made out to you). The IRS may require 20% withholding, and you only have 60 days to redeposit the full amount or face taxes + penalties.

Step 4: Don’t Forget to Invest It 

Rolling over your 401K is only step one. Once it lands in your new plan or IRA, make sure it’s actually invested, not just sitting in cash. Typically when rolling over into a new plan, it will be taken care of for you. But if you’re rolling over to an IRA, TOO OFTEN, people roll over accounts and forget that money needs to be invested!!

So, What’s the Best Choice?

If you’re job hopping, please don’t let those old 401Ks collect dust and become an after thought. This is your money after all, no matter how big or small the account is! 

Each option has pros and cons, but my general rule of thumb:

• Roll into your new 401K if you want simplicity, one account AND the fees are low.
  
• Roll into an IRA if you want flexibility and control over investments.
  
• Avoid cashing out unless it’s absolutely necessary.

Your retirement money deserves attention now so you’re not scrambling later.

Are you ready to stop second-guessing your next money move?

If you’ve got an old 401K sitting around (or just want clarity on your bigger financial picture), let’s chat. I’ll help you sort through your options, avoid costly mistakes, and create a plan that feels simple and stress-free.

Apply here! Your future self will thank you for getting this off your to-do list.