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

Many companies offer retirement plans to retain employees and attract top talent. It’s a good strategy that can help people save more money for retirement. Due to tax benefits, these tax-advantaged accounts often grow faster than standard brokerage accounts. But what happens to your 401(k) when you switch companies? This guide will cover the choices surrounding your 401(k) plan if you leave your job. And keep reading to see how you can get personalized offers from our trusted partners through MoneyLion!

Understanding the basics of 401(k)

A 401(k) plan helps you save money for retirement and reach financial freedom sooner. These accounts have higher contribution limits than individual retirement accounts (IRAs). Many 401(k) offer tax deferral, allowing you to reduce your taxable income now and let your investments grow tax-deferred. These accounts minimize your taxable income and let the money accumulate in your account. You only have to worry about taxes when you withdraw funds from these accounts.

Some 401(k) plans follow the Roth approach. Roth account contributions get taxed right away, but you do not have to pay taxes on withdrawals. You won’t even have to worry about dividends or capital gains. Some retirement plans include vesting periods, which give you access to additional shares based on how many years you have worked at the company. There may be rules in place that restrict employees from selling company shares for a certain amount of time after receiving them.

4 options for your 401(k) when leaving a job

When you leave your job, you have four options with how to proceed with your 401(k) plan. Here’s what you can expect.

1. Leave your 401(k) with your former employer

If you leave your 401(k) plan with your former employer, you can no longer make contributions to that account. Your investments may continue to grow, and you can contact your 401(k) provider to make any adjustments. You can sell stocks and mutual funds in the account and shift those proceeds to other investments. You will still have to pay any fees associated with the 401(k) plan.

2. Roll your old 401(k) over to a new employer’s plan

You can take the funds from your old 401(k) plan and roll them into your new employer’s plan. This strategy allows you to continue contributing to your 401(k) plan. If you have multiple 401(k) plans, you can roll them over into your new account so they are easier to manage. You don’t have to worry about transfer fees if you switch from a traditional 401(k) plan to another traditional 401(k) plan. If you switch from a traditional 401(k) plan to a Roth 401(k) plan, you will get taxed. But funds in the Roth 401(k) plan will not be subject to taxation, including dividends and capital gains.

You can contact your old 401(k) provider or the financial institution in charge of the account to facilitate the transfer. It can take up to 60 days for a rollover to go through.

3. Roll your old 401(k) over into an individual retirement account (IRA)

Not everyone leaves their job for another job, and not every employer offers a 401(k) plan. If you still want to contribute to a retirement account, you can roll your old 401(k) plan into an IRA. The process for rolling your 401(k) plan into an IRA is the same as for rolling your 401(k) plan into another 401(k) plan. You have to contact the old plan provider or the financial institution overseeing the 401(k) plan and request the transfer. IRA plans have lower contribution limits, but you can have this account open even if you are unemployed. You may have further contribution restrictions if you earn too much income.

4. Cash out your 401(k) 

You can cash out a 401(k) plan, and it may be necessary to take this path. You will have to start cashing out on your 401(k) plan when you turn 72, but it is not a good idea to cash out on your entire plan. 

Cashing out your 401(k) early isn’t the best move because of penalties and taxes. The withdrawals from a traditional 401(k) plan count as ordinary income, so you will end up in a higher tax bracket that year. Many people wait until they retire to withdraw from their 401(k) plans to minimize their tax payments.

What to consider when deciding what to do with your 401(k)

You have a lot to consider when deciding what to do with your retirement accounts. These are some of the factors to consider before you make a decision.

1. Investment options

Investors should consider what options their new 401(k) plans provide. While many 401(k) plans let you invest in stocks and mutual funds, other plans also let you invest in alternative assets. Some investors are fine with stocks and mutual funds, but other investors may want more variety. 

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2. Fees

If the fees for your new 401(k) plan are much higher than your old 401(k), it may make sense to stay put. The funds in your old 401(k) can still appreciate over time, and you can make adjustments to your portfolio. It makes sense to roll over your funds if the fees are lower in your new 401(k) plan or IRA.

3. Accessibility

Keeping your funds in your old 401(k) may make them more difficult to access. Consumers should consider how accessible their 401(k) funds are whether they need to make early withdrawals or they are ready to retire.

4. Tax implications

Tax implications apply if you cash out your 401(k) or convert funds from a traditional 401(k) plan to a Roth 401(k) plan. You can have a high tax bill if you cash out your funds because distributions get treated as ordinary income. If you need to withdraw cash for an urgent expense, you may want to consider a personal loan from MoneyLion’s marketplace instead. Getting a personal loan will be less expensive because you won’t have to pay taxes on your 401(k) funds.

5. Overall retirement savings strategy

Each investor has a different retirement strategy. Understanding your time horizon, investments in your current 401(k), and other factors can help you decide the best course of action. Investors who still want to contribute to their retirement accounts but don’t want to work full time anymore may want to roll their funds into an individual retirement account. The right course of action varies for each person.

Building wealth for a smooth retirement

A 401(k) plan helps you build wealth in the long run. At some point, you will have to retire and use the funds in your account to support your lifestyle. Making frequent contributions often and reaching the maximum limit each year can help you build wealth and save money on taxes.

FAQ

What happens to your employer’s contributions if you leave your job?

If you leave your job, your employer will no longer make contributions to your 401(k) plan. Previous contributions remain in your account.

Can you still contribute to a 401(k) if you leave your job?

You cannot continue to contribute to a 401(k) plan if you leave your job. You can roll it over to a new retirement account, hold onto it, or cash out.

Can you transfer your 401(k) to your spouse or someone else?

You cannot transfer your 401(k) to your spouse or someone else. Divorces are the only exception.