Understanding your 401(k) Options When Your Leave Your Job

By Tamara Stein on March 31, 2023

One of the hardest parts of retirement planning is getting started.

If you opened and saved through a 401(k) plan at a former employer, you should pat yourself on the back for making a smart decision, even if you are no longer at that job or are planning to leave soon. But you may also be unsure about what to do with your 401(k) after leaving your job.

When you change employers, regulations make it easy for you to keep investing those savings tax-deferred, as long as you don’t cash out. In addition to losing out on the considerable benefit of tax-deferred growth potential on pre-tax earnings, cashing out can trigger hefty penalties. Generally, if you withdraw money from your 401(k) account before age 59 1/2, must pay a 10% early withdrawal penalty, in addition to income tax, on the distribution.

You have three other options for handling your 401(k) when you leave your job:

1. You can leave the funds in your former employer’s plan (if permitted).
2. Roll over the funds to your new employer’s plan (if one is available and if rollovers are permitted). You may want to compare plan fees and investment options before you make this decision.
3. Roll over the funds into an IRA (Individual Retirement Account). There may be greater support for investment decisions and holistic wealth management that you may be able to access through an IRA.

There are other factors based on your personal situation that you may want to consider before making a decision. Each option offers advantages and disadvantages, depending on your particular facts and circumstances (including your financial needs, goals, and objectives). Some of the factors you should consider when making a rollover decision include the differences in (1) investment options, (2) fees and expenses, (3) services, (4) penalty tax-free withdrawals, (5) creditor protection in bankruptcy and from legal judgments, (6) Required Minimum Distributions (RMDs), (7) tax treatment of employer stock, and (8) the availability of plan loans. The decision of which option to select may be complicated and must consider your total financial picture.

Discuss your or anyone who would benefit from 401(k) options with us today to reach an informed decision.

Best,

Joseph Feinberg, Tamara Stein, and Mark Zhuravlev

Source: Dan Hunt, Morgan Stanley.