Changing jobs can be an exciting time. Whether it’s for career growth, better work-life balance, or a new industry, there’s a lot to think about—negotiating your salary, adjusting to a new workplace, and learning new processes. But one question that often gets overlooked during this transition is, “What should I do with my 401(k)?”
If you have a 401(k) account from your current employer, figuring out the next steps can feel daunting. But don't worry—this guide will walk you through your options so you can make a decision that best supports your financial future. Plus, we’ll advise you on when to consult with a financial advisor to nail down the right strategy for your unique situation.
What Happens to Your 401(k) When You Switch Jobs?
When you leave a job, your 401(k) retirement account doesn’t automatically disappear—it’s still your money. However, what happens next can vary depending on your employer's policies and the decisions you make. Some companies may allow you to leave it as is, while others may require you to act sooner rather than later, especially if your balance is below a certain amount (usually $5,000).
The good news? You have several options to consider, and each comes with its own pros and cons.
Option 1: Leave Your 401(k) Where It Is
The simplest option is to leave your 401(k) with your old employer’s plan—if their policy allows it. This is typically referred to as maintaining an “orphan 401(k).”
Pros:
- Convenience. No additional steps needed to move the funds.
- Continued Growth Potential. Your investments will remain the same and continue to grow tax-deferred.
- Access to Institutional Funds. Employer-sponsored 401(k)s often have access to low-cost institutional mutual funds, which can be attractive compared to retail accounts.
Cons:
- Limited control. You can no longer contribute funds, and managing multiple accounts can get messy if you switch jobs again.
- Higher Fees (Potentially). Some plans may have higher fees or administrative costs for former employees.
- Lack of Diversity. You’re limited to the investment options your old employer offers.
When to Consider This Option
If your 401(k) plan offers excellent investment options and low fees, you may opt to leave it as is. Just ensure you stay on top of it—don’t lose track over time.
Option 2: Roll It Over to Your New Employer’s 401(k)
Most employers allow you to transfer your old 401(k) balance into your new employer’s plan once you start.
Pros:
- Simplified Management. Rolling your old 401(k) into your new one consolidates your accounts, making them easier to manage.
- More Contributions. Once rolled over, you can continue contributing new funds under the same plan.
- Access to Institutional Rates. Like most 401(k) plans, your new employer’s plan may offer access to low-cost investment options.
Cons:
- Limited Investment Choices. This depends on the structure of your new employer's 401(k).
- Compatibility Issues. Not all employers allow incoming rollovers, and it may involve paperwork.
When to Consider This Option
If your new employer offers a strong 401(k) plan and you want an all-in-one account, rolling over could be ideal.
Pro Tip: Ask your new employer’s HR team about fees and investment options before making a decision.
Option 3: Roll It Over to an IRA
Instead of moving your funds to another 401(k), you can roll them over into an Individual Retirement Account (IRA).
Pros:
- Greater Investment Options. IRAs typically offer more investment choices than 401(k)s, including stocks, bonds, ETFs, and mutual funds.
- Better Control. You have control over how your money is invested and flexibility in managing it.
- Roth Conversion Option. You have the option to convert to a Roth IRA to enjoy tax-free withdrawals in retirement.
Cons:
- Account Costs. Depending on where you open your IRA, there may be costs associated with managing your investments.
- Tax Rules. IRAs come with specific tax rules based on the type of account, which may impact your contributions or withdrawals.
When to Consider This Option
This is a great choice if you value flexibility and want more investment options. However, rolling over to an IRA may come with tax implications, so it’s best to consult a financial advisor.
Option 4: Cash Out Your 401(k) (Not Recommended!)
You also have the option to cash out your 401(k) and withdraw the funds as a lump sum. But here’s why you shouldn’t rush into this decision:
The Drawbacks:
- Tax Penalties. If you’re under 59½ years old, cashing out comes with a hefty 10% early withdrawal penalty, plus income taxes.
- Lost Growth Potential. You lose the power of compound growth for your retirement savings. It could set you back years in building a comfortable nest egg.
When to Consider This Option
This should only be considered in extreme financial emergencies. Even then, speak with a financial professional about potential alternatives before cashing out.
Tips for Making the Best Decision
Here are some tips to help you decide how to manage your 401(k) when switching jobs:
1. Review the Details of Your Current Plan
Check account fees, investment options, and employer policies to determine if it's worth keeping.
2. Explore Your New Employer’s Plan
Ask your HR team for detailed information about the new 401(k) plan. Look for match opportunities, fee structures, and investment diversity.
3. Factor in Your Financial Goals
Think about your retirement timeline, risk tolerance, and investment preferences.
4. Talk to a Financial Advisor
If you’re feeling unsure or overwhelmed, consulting with a financial advisor is a smart move. They can help guide you toward a decision that aligns with your long-term financial goals and handle the paperwork.
5. Don’t Rush the Decision
You typically have time to decide what to do with your 401(k). Take the time to evaluate your options.
Secure Your Financial Future With Confidence
Switching jobs is a significant transition, and a 401(k) decision often gets overlooked. By understanding your options and aligning them with your financial goals, you can make a smart move that strengthens your future.
If you’re still unsure about the best course of action, connect with a financial advisor today. They can tailor advice to your personal situation, ensuring your decision works for you both now and in retirement.
Make your 401(k) work smarter—your future self will thank you.
Get in touch with a Financial Advisor today =>