I just switched jobs. What do I do with my 401k account with my old employer?

I just switched jobs. What do I do with my 401k account with my old employer?

March 12, 2024

Question: I just switched jobs. What do I do with my 401k account with my old employer?

 

Answer: 

According to the US Bureau of Labor Statistics, the average American hold about 12 jobs in their adult lifetime.* That boils down to a change in a job about every 3-4 years for someone who works for 40 years.

Sounds like a lot of change! Throughout that timeline, many of those workers will contribute to their employer’s retirement plan, whether it be a 401k, 403(b) or other type. This brings about a question we get often here at Rockline Wealth Management, which is, what are the options for a distribution for my old employer’s retirement plan?

Here we are going to break down a few of the options that you would have and give pros and cons of each.


Previous Employer Sponsored Distribution Options:


1) Leave the money where it is:

Pros: The good news is that unless there are extenuating circumstances, your money should continue to stay invested within the funds it was allocated to and still have the potential to grow over time.

Cons: A drawback here is that you wouldn’t be able to continue to contribute money into that account and wouldn’t have as much control over the investment options within the account.


2) Rollover the old account into your new employer’s plan:

Pros: Here you will have much more control over the investment options and be able to continue to contribute money into this account. Consolidation of your investments may also be a good thing as it could help you to properly diversify those assets.

Cons: Your new employer may not have a retirement plan in place or their investment options within the plan may not be right for you and carry high fees.


3) Withdraw the money and take a taxable distribution:

Pros: You would have immediate access to your funds which can be used to pay off debts, buy a house or for other life expenses.

Cons: If you are under the age of 59 ½ you would have a 10% withdrawal penalty on the full amount withdrawn. If you had a traditional account set up, you will have to also pay a capital gains tax on the money withdrawn. For a ROTH account, you would also pay the 10% withdrawal penalty and ordinary income tax on any gains you made within the account. Either of these options could drastically decrease the amount of money your account could've grown to over time. 


4) Roll over the money into an IRA:

Pros: Good news here is that you can continue to contribute to the account. The investment options in an IRA are also generally more diverse than those of a 401k or 403(b) as employer sponsored plans such as those are generally limited to mutual funds. IRA’s give you options to invest in individual stocks or bonds and ETFs as well as Mutual Funds.

Cons: If you are working with a financial advisor on your IRA, ensure that you understand the costs associated with opening up the IRA with them. Making sure that the advisor is a fiduciary can help to give you confidence that the advisor will work for your best interests. If you are going to roll the money into a self-directed IRA, not having the professional help to make sure you are properly diversified could hurt your overall financial outlook over time.

 

The Last word:

All of these options could be on the table for you and each of them comes with their advantages and disadvantages. Ultimately, understanding your specific financial situation should guide the choice that is best fit for you. We would always suggest working with a financial advisor in making this choice as they have most likely helped others similar to you do the same.

 

Do you have questions you would like us to discuss here? Click this link to let us know and we hope you found this helpful!

* Source: https://www.bls.gov/nls/questions-and-answers.htm#anch41