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.

The 401K Retirement Plan Option Was Born

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 & Yours to Keep

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.

A Few Things to Understand About Your 401K Plan Before Leaving Your Company

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:

Get an Understanding of the Vesting Schedule

• Vesting is a feature within certain employers’ 401K plan documents that state a participant/employee will not have ownership of the employers’ contributions unless that employee stays at the company for a specified amount of time. It is used as a way to incentivize employees to stay at their current jobs.
• The vesting schedule pertains ONLY to the employer contributions. Your contributions that you put in with your own money, are yours to keep.
• It will be important to get an understanding of the vesting schedule so you can identify the money that you will be forfeiting as a result of leaving the company.
  
  

Confirm Whether or Not You Can Leave the 401K In the Current Plan

• You may have the option to leave the account as is. But if your 401K account balance is less than $5,000, your employer may require you to move the funds elsewhere or have the option to close the account and distribute a check to you.
  
  

Get an Understanding of the Fees

• Often times the fees associated with an employer plan are a little bit higher than what you may pay opening a self-managed IRA account at another brokerage firm. I would want to understand what the fees were before deciding what to do next.
  
  

After you understand the above, then you can leave.

Here Are Your Former 401K Plan Options

If you have the option to do so, you may leave it in your former employer plan.

• In most circumstances, your account will remain invested, you will continue to have discretion over the investments, but you will no longer have access to contribute to the plan.
  
  

If you have the option to do so, you may roll over your old 401k into your new 401k plan

• If this option is available to you, if it were me, this is what I would choose to do! I have an appreciation for simplicity, especially in my financial life. I would much prefer to have my accounts consolidated together than to have multiple retirement accounts at different firms, with varying amounts and invested in different things…. That makes me cringe just thinking about it.
• You will need to confirm with your new employer if you are able to roll over your old plan into your new one. That is very common to do, but every employer plan is different so you will want to know this before making any decisions on how to proceed.
  
  

You May Roll your 401k over into an IRA

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:

• If you have a Traditional 401K, you may roll it over into a Traditional IRA. There will be no tax implication to doing so as you are going from one Pre-Tax Retirement account to another.
• If you have a Traditional 401K, you may roll it over into a Roth IRA. IF you choose to do this, PLEASE know that your rollover will be deemed a taxable event. You are going from a Pre-Tax retirement account to an After-Tax retirement account and thus, your funds now have to be taxed before being put in the Roth IRA.
  • So if you are rolling over a Traditional 401K into a Roth IRA, please mentally prepare to pay ordinary income tax on the account balance. That could be anywhere between 20% – 40% depending on where you live and your other income on your tax return.
• If you have a Roth 401K, you may roll it over into a Roth IRA. There will be no tax impact to doing so as you are going from one After-Tax retirement account to another.
  
  

You May Take a Lump Sum Withdrawal

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.

A Few More Helpful Thoughts

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.

Once You Roll The Funds Over….You Need to Invest Them!

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