4 Ways To Manage Your 401(k) Account After Switching Jobs

Job switching can be a difficult but enjoyable process. After you submit that two-week notice, the preparation for the transition officially begins – just make sure you make room on your to-do list to figure out how to manage your employer’s 401(k) plan. old.

It’s actually pretty easy to forget your 401(k) balance. According to a study from Capitalize, a financial technology company, there are about 24.3 million forgotten 401(k) accounts in the US. This is money that could go completely unused if the account holder never accesses the account again and makes a withdrawal. So it’s important to make sure you’re following old accounts when you change employers.

When it comes to managing your old 401(k) account, there are many options across the board.

But before you start weighing the pros and cons, be sure to write down the login information for your 401(k) account and change the primary email address on the account to your personal email. This way, you won’t lose access to your account after you leave your job.

You should then check with your former employer’s 401(k) provider to see what their policy is when it comes to managing your account after you leave. You may have a specific time frame for making decisions, some actions may not be an option in your plan, and there may be certain circumstances where you may lose some of your balance. 401(k) if you don’t stay with the company long enough for it to be fully catered for.

Once you understand the account management policies, you can now consider the best option for you.

One of the simplest things you can do with your old 401(k) account is to just leave it in its place – this requires no further action from you.

“Most companies allow you to do this so your money continues to grow according to your chosen investment method. [when you first started work at that company]”, Jessica MacDonald, Vice President of Thought Leadership at Honesty. And, you can still withdraw without penalty once you reach 59 and a half years old.

Just be aware, however, that if you have an account balance of less than $5,000, the account can be converted to an IRA.

Another reason why you might choose to keep your money in your former employer’s plan is if you really like the investment options it offers. Some employers may offer more access to certain types of 401(k) investments, like a broader range of mutual funds rather than just target date funds.

However, there are some potential downsides that you need to be aware of when deciding to go this route. For starters, you usually won’t be able to contribute further to this plan after you switch jobs. And, your former employer’s plan administrator may charge additional bookkeeping, administrative, and legal fees to continue to manage the account.

Plus, you’ll have fewer withdrawal options if you left your 401(k) on your former employer’s plan. You may have to withdraw the entire balance even if you don’t need the full amount (partial withdrawal is usually not an option when you go this route). So let’s say that your 401(k) balance is $20,000 and you only want to withdraw $10,000 – you would have to withdraw the full $20,000 even if you only needed half of it. And, of course, you will be taxed on this and subject to a 10% penalty if you make your withdrawal before age 59 and a half.

And, you won’t be able to borrow a 401(k) on top of your balance.

So if you’re happy with the investments you’ve made in your old 401(k) plan, don’t worry if there are extra fees and don’t really intend to cash out in the near future or until when you reach retirement age, simply doing nothing with the account and leaving it with your former employer seems appealing.

Another option is to convert your 401(k) balance into one IRAs. This can be an existing IRA that you opened before or a new IRA. And, you can open it at any broker you want (Choose has identified the Fidelity Investments IRA as the best account for beginners. But if you need a little more guidance, the Betterment IRA also gives it. gives you access to a robotic advisor who can help with risk assessment and rebalancing).

Simply call the brokerage firm where your IRA is based to get a detailed outline of what the next steps will look like to complete the transition, and call your old 401(k) provider. you to inquire about their closing process. There may be forms you’ll need to fill out with the details of the money transfer, and you should ask if a check with a 401(k) balance will be mailed to you so you can deposit it yourself or if it will be mailed straight to you. your IRA brokerage firm.

Another advantage to the convertible option is that you’ll be able to get free withdrawals on your first home purchase or higher school costs – even if you’re under 59 and a half. Of course, since this is a pre-tax account, you will still owe tax on the money you withdraw.

Moving your plan into an IRA means you’ll have more control over the different ways you invest your balance – you won’t be limited to investing only funds set by your employer your old offers. You’ll have thousands of investment options with a variety of major brokerages, including mutual funds, index funds, and individual stocks.

Just keep in mind that once you reach age 72, you’ll have to take the required minimum distribution from your traditional IRA account even if you’re still working.

This option requires a bit more upfront work, but in the long run this route can give you more flexibility, especially when it comes to your investment choices and the possibility of future withdrawals. near future.

You’ll have to double-check with your new employer to make sure they accept a transfer from your previous job. But if you keep doing this, you’ll be able to manage just one 401(k) account instead of two potentially different accounts from two different plan providers (or even more, depending on your needs). depending on how many previous jobs you have had).

MacDonald explains: “Some people find that having only one 401(k) account makes it easy to see all of their money in one place.

The money will still have a chance to grow in your new employer’s plan – just make sure you like the new one. investment options available to you. And you’ll be able to save on all the extra costs that come with just keeping your balance with your previous employer.

And unlike with the IRA rollover option, you won’t have to make the required minimum distributions at age 72 if you roll the money into your new employer’s 401(k) plan.

“Ultimately, it became convenient,” MacDonald said. “And if you want to see all your stuff in one place, this option might make sense.”

And the last option, which is often discouraged, is withdraw the balance in your former employer’s 401(k) account. This way, you’ll usually get your money in the form of a check mailed to you. However, there are some serious the downside of doing this.

“Withdrawing a 401(k) is an absolute last resort as there are consequences to doing this,” MacDonald said. “If you do this before age 59 and a half, you will have to pay a 10% penalty and be subject to tax.”

Fidelity actually illustrates the consequences of cashing out your 401(k) with an example on its website. Let’s say you have a balance of $50,000 in your 401(k) account and you decide to withdraw it before age 59 and a half. A 10% early withdrawal penalty fee will be up to $5,000. Then, assuming a 7% state income tax rate, you’ll have to pay $3,500 in taxes. And finally, at the assumed 24% federal marginal income tax rate, you’ll have to pay an additional $12,000 in federal taxes. Essentially, this means that instead of cashing out and walking away with $50,000, you’ll actually be left with $29,500 after taxes and a 10% penalty fee. Plus, you’ll lose years of tax-free and compounding growth from your investments.

The only scenario where you should withdraw your 401(k) is if you are in dire need of money and have no other choice. But even then, you should consider a personal loan or 0% APR credit card before doing so. Otherwise, you should avoid cashing out and consider one of the other three options above to keep your money growing on a tax-deferred basis.

Switching companies can be a hectic process – just don’t forget to figure out what you’re going to do with your old 401(k) account. The right choice will depend on your needs and whether you already like the investment options offered by your previous employer. However, the worst thing you can do is sit in the back seat and ignore your 401(k).

“The biggest mistake is not taking the time to weigh your options,” warns MacDonald. “And another mistake is to cash out and not play an active role.”

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