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Blog: What Happens to a 401(k) When You Quit Your Job

Most Americans today have an average of 12 jobs in their lifetime. Gone are the days of getting a job straight out of school and staying there until the day you retire. With moving jobs often comes the question, “what should I do with my old 401(k)?” Most people don’t want 12 retirement accounts sitting around. You’ll want to ensure you are setting yourself up for financial success in retirement. Deciding what to do with your 401(k) retirement plan when you quit your job is an important decision to make.

In this article, we will discuss your top four options on what to do with a 401(k) when you quit your job.

401(k) basics

Before we get into the details of what happens to your 401(k) when you leave a job, let’s start with some basics of the 401(k). Many people have access to a 401(k) retirement plan. This is a plan offered through an employer and allows employees to save either pre-tax (traditional) or post-tax (Roth) money out of their paychecks each month. Many employers also offer a matching contribution to their employee’s 401(k) accounts. 401(k) accounts have limits on what the employee can add, and the total that can be contributed to the account during each tax year.

401(k) vesting

One important term to know when leaving an employer is the term “vesting.” You may have heard about it or read about it in your employee handbook when you began your job. Vesting is the time at which the money the employer placed into your 401(k) (or other retirement accounts) becomes fully your money. The money that you as the employee add to your account is always yours, there will be no vesting schedule placed on money you add from your paycheck deferrals.

Here is an example of Vesting: Let’s say your employer makes a 5% matching contribution to your 401(k). This means that if you put 5% of your salary into your 401(k), your employer also adds the same amount to your 401(k) out of their pocket. Now let’s say the employer says you will vest in your 401(k) 20% per year of employment. This means that if you left your job after 2 years, you would be vested in 40% of the money the employer added over that 2 years. When you leave, you would forfeit 60% of the funds the employer matched over the time you were employed.

In order to be fully vested in the employer match in the example above, you would have to remain at that job for five years. The longest an employer can make you wait to be fully vested is six years. Many employers have shorter vesting periods, and many have none at all, meaning once they add the money to your 401(k), it is yours when you leave the job.

Now that you know the basics of a 401(k) and what vesting means, let’s discuss your options for a 401(k) when you leave your job.

Option 1: Leave the money with your former employer’s 401(k)

If you have at least $5,000 in the plan when you leave the job, you can keep the money where it is. If you have between $1,000 and $5,000 in the plan, the employer can either allow you to remain in the plan, or they can roll your 401(k) funds into a rollover IRA for you. If you have less than $1,000 in the plan when you leave, the employer can allow you to leave your money in the plan, but they are also allowed to cut you a check for the full amount in the account.

If you do have less than $1,000 in the 401(k) when you leave the employer, it is important that you find out if they will automatically send you a check. If that is the case, you will need to act quickly to get those funds into another retirement account to avoid paying taxes and penalties on this amount. While $1,000 seems small, it can add up, and we don’t want to pay the IRS more than we have to.

So when is it a good idea to leave funds with an old employer 401(k)? Consider the investment options and fees in that plan. If the fees are low and investment options are good, you may want to consider keeping your money where it is. You can start contributing to your new plan with your new employer while the money in your old 401(k) plan is left to grow.

You can also use this method if you want to hold off on making a decision. There isn’t a deadline for rolling an old 401(k) plan out. If the employer allows you to leave it there, you can leave it there while you decide what the best next steps are. You can leave it for months or years and even until retirement. If at any point you decide rolling it to another plan is the best option, you can do that at any time.

To find out the other options for a 401(k) when you quit your job, visit our blog.

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Alvin Carlos, CFA, CFP®

About Alvin Carlos, CFA, CFP®

Alvin Carlos, CFA, CFP® is passionate about helping middle class professionals make smarter financial decisions. He is the CEO of District Capital Management, a financial planning and investment management firm for the everyday people. Alvin is a CERTIFIED FINANCIAL PLANNER™ practitioner and has a Masters degree in International Relations from SAIS-Johns Hopkins. In his spare time, Alvin enjoys swing dancing and Ultimate Frisbee. He also volunteers for Catholic Charities’ new Financial Stability Network, which helps low-income folks with their finances.

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