401(k)s: Four Options for your Retirement Plan when Changing Jobs

Employees often ask us what options they have with their 401K when changing jobs. Below we have outlined 4 different options when transferring jobs.

Leave money with former employer

You always have the option to leave your funds with your former employers. If you balance is less than $5,000, your former employer may choose to distribute your funds to an IRA. For this, they do not need your consent. If there is less than $1,000 and an individual doesn’t choose an action, the employer may distribute the funds directly to you which is a taxable event. If the former employer does end up moving the money, there are likely going to be fees involved so it’s best to take care of this early on.

Move the money into new employer's retirement plan

Most employers will allow you to roll your retirement plan into your new employer’s 401(k). Employers will help facilitate the process and there are no tax consequences or penalties with this option.

Move the money into a Rollover IRA

These types of accounts take the place of old 401Ks and are advantageous for employees who tend to move jobs frequently. When someone does a direct rollover, there are no tax consequences or penalties. Also, Rollover IRAs allow individuals to choose their investment options including stocks, bonds, mutual funds, and ETFs. Rollover IRAs tend to be flexible so a person may be able to roll their assets back into their employer’s 401(k). Some employees do this when they prefer the plan investments, working with a professional financial advisor, and keeping assets consolidated.

Take the 401K money

This option is referred to as a lump-sum distribution and is a taxable event. You will be taxed at your current tax bracket. Also, if the person is younger than 59.5, they will likely pay an additional 10% penalty. If you live in California, there is an additional 2.5% penalty. It is best for individuals to consider their tax bracket, state and local taxes, as this option can considerably reduce someone’s savings.