Our generation is constantly on the move- personally and
professionally. We tend to leap between corporate ladders rather than scale
just one. While this movement can be good for your career, you may be leaving
something behind at your old job- a 401(k). Don't forget about it as you're moving on.
A 401(k), as an employer-sponsored retirement plan, is always
tied to a specific company. When you leave that company you lose the ability to
add to your retirement account and some companies insist that your roll your account balance out of their plan
within a certain time frame. So
what do you do with your 401(k)?
Start by determining how much of your account balance
actually belongs to you. There are only two ways that money gets into to a
401(k)—your contributions and the company’s contributions. Your contributions, added through withholding (deferral) of your pay, always belong to you. The
funds that your company contributes, however, may have a “vesting schedule,”
which means the funds do not fully belong to you until you work at the company
for a set amount of time. The most restrictive vesting schedule is either a
three-year cliff, where none of the company contributions are available until
you have worked there for three years, or a five-year grading schedule, where
you vest 20% a year and become fully vested after five years of employment. You
can find your vested balance noted on your quarterly statement. If you are debating
whether to leave your job you should consider your 401(k) vesting schedule, if
you are close to vesting it may be advantageous to stay for another month or
two.
Once you leave your job, there are four options for your
401(k)—roll it to an IRA, roll it into a 401(k) at your new company, withdraw
the funds, or leave it in the old 401(k) plan.
For most people, the best option is to roll your 401(k) into
an Individual Retirement Account (IRA). Rolling your 401(k) to an IRA retains
its tax-advantaged status and increases your investment options. Many IRA
custodians, including Charles Schwab, Fidelity, E-Trade, and TD Ameritrade, do
not change fees on your account. If you
are not yet eligible for your new company’s 401(k) you can add to the IRA to prevent a break in your savings, although total
contribution are limited to $5,500 a year and income limitations apply to Roth
IRAs. Most importantly, an IRA drastically increases your investment options.
401(k)s are typically restricted to a short list of mutual funds, while IRAs
allow you to invest in stocks, bonds, ETFs, and the entire universe of mutual
funds.
Occasionally it is more advantageous to roll your account
into your new company’s 401(k). A 401(k) is protected from lawsuits and
bankruptcy, while state laws vary may allow the inclusion of IRAs in those
procedures. Another advantage to a 401(k) is that you can take a loan from your
account. If you are in dire straits and need to use some of the funds in your
account, you can access them through a loan without paying taxes or incurring a
penalty. You must pay the funds back within a specified time period or upon
leaving the company (voluntarily or involuntarily). If you do not pay back the
funds it will count as a distribution and you will owe taxes. While 401(k) loans
are tricky and should only be used under specific circumstances, it is an
option available in a 401(k) that is not available with an IRA.
Some companies allow you to keep your 401(k) account in
their plan even after you leave the company. This is generally not recommended
unless you have a platinum 401(k) plan with low fees, access to institutional
mutual funds at a lower cost, and unbiased investment advice that you can
access after leaving the company. This is rare. Investigate thoroughly before
choosing this option, you may be charged extra fees on your account and could no
longer be eligible for the investment advice paid for by the plan.
The last option is to withdraw your funds from the plan.
This is truly your LAST option! While available as a last resort, you should
consult with a financial advisor before cashing in your 401(k). The entire
amount will be included in your income at the end of the year (unless it is a
Roth) and you will owe a 10% penalty for withdrawing prior to age 59½. Your
401(k) plan should have a plan advisor available for you to talk to who can
help weigh it against your other options.
So as you ride off to the next great adventure of your
career, remember to take with you the knowledge you’ve acquired, the experience
you’ve gained, the connections you’ve cultivated…. and the retirement savings
you’ve worked so hard to build.
