Most adults will move on to a new employer multiple times throughout their careers. In fact, a 2019 survey by the U.S. Bureau of Labor Statistics found that baby boomers had an average of at least 12 jobs in their lifetime. That means, at some point, you'll most likely have to think about what happens to your 401(k) when you leave a job.
The answer, in most cases, is up to you. Unless you have a relatively small balance, you can choose to leave the funds where they are, cash them out or move them into a new account through a 401(k) rollover. It's a decision that can affect your financial future, so it's important to understand the ins and outs of each option.
Cashing Out Your 401(k)
If you have less than $5,000 in your 401(k), the plan sponsor might liquidate your account automatically and give you a check. Those who have higher balances may be able to request to have their funds withdrawn, either completely or partially, when they switch jobs. However, there are some disadvantages to cashing out your savings and putting it in a checking or savings account.
For one, it can be harder to reach your retirement goals when you're starting from scratch at your new employer. And if you're under the age of 55 when you terminate employment, the withdrawal may be subject to ordinary income taxes and a 10% early withdrawal penalty.
Keeping Your 401(k) With Your Previous Employer
The easiest choice in the short term may be to simply leave the money with your previous employer if that's an option. This route may make sense if you like the investment options your previous company offered, or they came with lower fees than those at your new job.
Despite those potential benefits, there are some potential downsides here, too. For example, you can't add new funds to the account and managing more than one retirement account could make it more difficult to track your overall savings.
Rolling Over Your 401(k) Into an IRA or New 401(k)
Some workers like the simplicity of having all their retirement funds in one place. If that's you, you might consider rolling over your old account into either your new 401(k) plan or an individual retirement account (IRA).
One of the advantages of moving your funds into your new employer's plan — that is, if it allows a 401(k) rollover — is the ability to manage all your workplace retirement assets from one place. You can also opt to roll your funds into an IRA, which may offer a greater range of investment options than a 401(k) or similar plan.
Avoiding a 401(k) Early Withdrawal Penalty
Those who liquidate their old 401(k)s have 60 days to add the funds into a new qualified retirement plan without triggering an early withdrawal tax penalty. But if you have your previous employer send the check to you, they're legally obligated to withhold income tax.
That's not the case when you do a "direct" rollover, where your previous plan administrator sends the funds straight to your new 401(k) or IRA. It's a simpler approach and one that can help you keep some of your retirement savings, since there's no income tax withholding. The retirement plan administrator or IRA provider will have forms that allow you to make a direct transfer.
Just like selecting a retirement planning strategy will differ from person to person, there is no one-size-fits-all solution when deciding what happens to your 401(k) when you leave a job. Be sure to review your retirement goals and your progress toward them as you compare your options. A financial representative can also help guide you.