In the late 1900’s…. I can’t help but laugh when writing that. I heard another Mom joke the other day 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 giggle to think about calling the 80’s or 90’s anything BUT the 80’s or 90’s.
Anywho, back when my parents were young in their careers, it was common and quite frankly expected that you stay in the same career path and have the same employer for most of your career. Employees were incentivized to stay by being offered retirement and pension benefits.
Stay with us for X amount of years and you could have X when you retire. Sounds pretty nice actually.
But all that changed in the 70’s and 80’s when increasingly more employees wanted the ability to manage their own assets and have control over their own retirement funds.
But not only have the retirement offerings changed over time, but so have employees’ desire or need to stay at one particular company for the entirety of their career. 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.
With that said, staying at one firm for your whole career is now the exception, not the rule. I think it’s safe to say that this blog post probably is relevant to the majority of readers.
So if employees are contributing to a 401K at their current company, but plan to leave, what happens to their old 401K plan? Let’s take a look.
Your 401K is in your name, you own it, not your employer. When you leave a company, you will no longer receive employer contributions nor will you be able to contribute to the 401K plan. But the 401K itself is yours.
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:
After you understand the above, then you can leave.
You have the option to roll over your 401K into an IRA account at a a brokerage firm (like Fidelity, Vanguard, Merrill Edge to name a few). Below are a few different scenarios to consider:
This option is available to you, not recommended by me, but available to you. If you are taking a withdrawal prior to age 59 1/2 you may be subject to a 10% early withdrawal penalty. If in a traditional 401K, you will owe income tax on the amount of the withdrawal.
Please do not liquidate or initiate a rollover for your 401K until you have somewhere else for it to go. If you opt for an indirect rollover, sending the check to you for you to deposit at your leisure, be aware that you have 60 days to put the funds into a new retirement account. If you do not meet that time limit, it will be deemed a full distribution and you may owe tax on the amount distributed and may face penalties for early withdrawal.
Employer 401K plans are required to withhold 20% of the funds for indirect rollovers. So if your plan is to contribute back to a retirement account, then I would advise against an indirect rollover.
Consider when rolling over your 401K to any new plan, when filling out the paperwork, opting in to the direct rollover. A direct rollover will mean that either a check or electronic transfer will be made from your current 401K directly made out to your new plan or IRA custodian. This will result in a smooth transition and rollover of funds.
If you are accumulating 401K’s from employer to employer, please consider consolidating them into your current 401K plan or into an IRA. This will eventually become an absolute nightmare for you to manage all the different accounts.
Act quickly. Once you leave a company, make a game plan for what you want to do next with your old 401K plan. Life gets busy…be proactive and take care of it immediately after you leave.
As mentioned before, if it were me, I would always opt in to rolling over into my new 401K plan if I had the option to do so. Simplicity, consistent retirement investing and higher contribution limits in a 401K plan vs. an IRA.
Reach out to me directly if you have any questions!
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Another blog post you might find helpful related to 401Ks: The Grand Debate: The Traditional 401K vs The Roth 401K