What to Do With Your 401(k) When Changing Jobs?

Every employer has their own set of benefits! However, they also come with their downsides. Sometimes the benefits aren’t enough to outweigh the downsides which is why people may decide to change their job. However, it can be stressful because people may have a retirement plan at their original employer. That’s because some employers offer 401(k) plans. Since these accounts are offered by your employer, you may have questions about what happens when it comes to these accounts if you decide to change your job. Luckily, it’s not as complex or stressful as it may seem!

What are 401(k) Plans?

Before we discuss what to do with your 401(k) when you change your job, you will want to make sure you have a clear understanding as to what 401(k) plans are. This type of retirement savings account is only offered by employers. This can vary by employer so not everyone will have the same plan opportunities. It’s also important to note that there are different types of 401(k) plans! That’s because the Internal Revenue Service (IRS) will offer different tax advantages depending on the type of account.

Different Types of Plans

There are two main types of 401(k) plans. There are:

  • Traditional 401(k)s
  • Roth 401(k)s

What is a Traditional 401(k)

A Traditional 401(k) is a bit different from the other 401(k) option on this list. This is more common so it’s what most people think of when it comes to a 401(k) plan. This type of retirement account is funded with pre-tax dollars. That means the funds that go into this account have not had any taxes applied to them! Since the funds are pre-tax, that means people can count them as a tax deduction.

Why is that important? Well tax deductions can reduce your overall taxable income. That means you would end up paying taxes on less income at the end of the year. For example, let’s say you made a $5,000 contribution into your 401(k). In that same year, your annual taxable income was $43,000. You can apply that $5,000 contribution tax deduction which would reduce your taxable income to $38,000. That means you would only pay taxes on $38,000 even though you made $43,000.

However, since people get the tax benefits at the time of the contribution, it will be a little different once it’s time to take funds out of your account. That’s because once you take funds out, you can expect to pay income taxes on them! They will be taxed at the standard income tax rate.

What is a Roth 401(k)

Another popular type of 401(k) account is a Roth 401(k). Many people like this account due to the tax benefits that come along with this option! This type of 401(k) is a bit different from a Traditional 401(k). That’s because this type of 401(k) is funded with after-tax dollars. That means the funds that go into this account have already had taxes applied to them. Since taxes have already been applied, that means people cannot get tax benefits right away. However, the tax benefits can come down the line! Once it comes time to take the funds out, there will be no additional taxes applied to the distribution.

What to Do with Your 401(k) When Changing Jobs?

When it comes time to change jobs, you will need to figure out what to do with your 401(k) account. The best way to figure out how to handle this process is by getting in touch with a professional.  However, there are four options that you can consider:

  • Keep the Funds in Your Former Employer 401(k) Account
  • Roll Your Funds Into Your New Employer’s Plan
  • Transfer the Funds Into an Individual Retirement Account (IRA)
  • Cash Out Your 401(k)

Keep the Funds in Your Former Employer 401(k) Account

If you have at least $5,000 in your 401(k), then you have the legal right to keep the funds in your former employer account. You will want to check with your employer to see how long you have to make a decision. Generally you will have between 30 days to 90 days. However, if your account has less than $5,000 then this may not be possible for you.

Roll Your Funds Into Your New Employer’s Plan

While every 401(k) plan is different, most plans accept rollovers from other retirement accounts. That means your new retirement account could accept funds from your old account! This is a popular option if possible because it is easy to manage and could provide new opportunities. This is an especially good option for people who are looking for different investment options. For example, your new employer’s plan could have better investment options compared to your old plan! However, you also run the risk that your new employer may have less investment options so you want to confirm before making any decisions.

Transfer the Funds Into an Individual Retirement Account (IRA)

Another popular retirement plan is an IRA. This is a popular retirement plan because it isn’t just for employees. Anyone can contribute to an IRA! If you decide to move your 401(k) funds from your original employer into an IRA then you could see more control and flexibility. You have more investment options and can take charge!

Cash Out Your 401(k)

Most professionals agree that this likely isn’t the best option for people. That’s because there are tax consequences that people don’t account for! One of the biggest tax consequences that you will face is a large tax bill. This can mean you reduce the overall amount you have depending on the taxes that you have to deal with.

Commonly Asked Questions

When it comes to understanding how to handle your retirement money in your 401(k) with your original employer and your new employer, it can feel complicated. That is why if you had questions when learning about this, then you’re not alone. In fact, other people had questions too!

What Happens to Your 401(k) When You Leave Your Job?

There are a variety of options when it comes to your 401(k) when you leave your job. However, not every option is the best decision. The best way to find the right decision for your situation is by getting in touch with a professional.

Is it a Good Idea to Cash Out Your 401(k) When You Change Jobs?

Most likely that would not be the best idea. That’s because cashing out your 401(k) can lead to a huge tax bill that reduces how much you can get from your retirement account. If you are trying to figure out the best way to handle your 401(k) when leaving your former employer you will want to confirm with a professional!

Can You Transfer Your Existing 401(k) to Your New Employer’s 401(k)?

Possibly! You will likely have the opportunity to do this. However, it is important to remember that every employer is different. That means that you may not have that option. You will need to check with your 401(k) plan administrator (your employer) to confirm whether or not this is an option.

What to Do If You Have Questions About Your Employer’s Plan?

Every employer plan is different. If you have questions you will want to talk to your employer. They will be able to provide you the information you need or contact details on a person that can answer your questions.

Is a 401(k) The Only Type of Account for Retirement Savings?

When it comes to saving up retirement money, there are a variety of accounts to consider. A 401(k) is not your only option. Instead, there are other opportunities like an IRA. When you leave your job you may have the opportunity to move your 401(k) funds into an IRA.

Should You Change Jobs If You Don’t Like Your Existing Employer’s Plan?

If you do not like your existing employer’s plan then you will want to take that into consideration. However, you can’t base all of your decision around this. For example, let’s say you don’t like your current employer’s plan but you make $5,000 a week. That may be enough for you to get over that downside of your job. The best option for your situation will depend on factors specific to you!

What Kind of Investments Can You See with a 401(k)?

We know we may sound like a broken record but it is important to remember that every employer is different. That means 401(k) plans can vary by a lot! However, there are some common types of investments that you could see which include:

  • Stock Mutual Funds
  • Bond Mutual Funds
  • Stable Value Funds

Can You Take Your 401(k) Account Out in a Lump Sum Distribution?

You do have the option to do this. However, it may not be the right decision. That’s because you could face a hefty tax which could reduce your overall amount that you have for retirement. Let’s look at an example for some more context! Let’s say the tax bracket you are in requires you to pay a 30% tax. If you want to cash out your account that has $55,000, you will only have $38,500 after taxes. The worst part? That distribution could potentially push you into a higher tax bracket for the year that you take it out.

Bottom Line

401(k) accounts are a type of retirement investment account that is offered by employers. It is important to know the different types of accounts because the Internal Revenue Service (IRS) provides different tax advantages depending on the type! Changing jobs can be a big decision for many people. Especially when they have a 401(k) with their original employer. Luckily, there are a variety of options to consider when it comes to your account. You can:

  • Keep the Funds in Your Former Employer 401(k) Account
  • Roll Your Funds Into Your New Employer’s Plan
  • Transfer the Funds Into an IRA
  • Cash Out Your 401(k)

The best decision will depend on your current situation and what opportunities are available. That is why you will want to get in touch with a professional so they can answer any and all questions you have about your specific situation.

Article References

https://www.investopedia.com/terms/1/401kplan.asp#toc-traditional-401k-vs-roth-401k

https://www.quicken.com/4-things-do-your-401k-when-you-change-jobs

https://www.investopedia.com/articles/personal-finance/112315/what-happens-401k-after-you-leave-your-job.asp#toc-what-happens-if-you-dont-roll-over-401k-within-60-days

https://www.bankrate.com/retirement/how-to-pick-401k-investments/

https://www.investopedia.com/ask/answers/081815/can-i-take-my-401k-lump-sum.asp#toc-options-when-you-leave-an-employer

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