Your 401(k): Don’t Forget About it After You’ve Been Gone

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.