When you change jobs, you face an important financial decision. What should you do with your 401(k) account? You have four choices. We explore the pros and cons of each choice below to help you make an informed decision. Show
1. Keep your money in your former employer's 401(k) planThis is your legal right if you have at least $5,000 in your account. Ask how long you have to decide. In most cases, you get 30 to 90 days. If your account holds under $5,000, your employer has the option of cashing you out of the plan. (If that's your situation, skip to choice #3.) Advantages
Disadvantages
2. Roll your money into your new employer's 401(k) planAlmost all 401(k) plans now accept rollovers from other retirement plans. You should certainly contribute to your new plan. But should you transfer your old account into it? Advantages
Disadvantages
3. Move your money into an Individual Retirement Account (IRA)This choice gives you maximum control and flexibility. With a 401(k) plan, the employer chooses the investments and makes the rules—and the rules vary from plan to plan. With an IRA, you’re in charge. Advantages
Potential Disadvantage
4. Cash out your old accountThink long and hard before you do this. It’s almost never the best choice—and it triggers a big tax bill! Advantage
Disadvantages
The bottom line: For most people, the best option is to move your savings into an IRA, which gives you the most freedom and control over your money. In this article:
If you're like many people, it's possible you'll switch jobs multiple times during your career. Currently, 1 in 5 workers say they are somewhat or very likely to look for a new job in the next six months, according to a 2022 survey by Pew Research. Frequent job hopping may make you wonder whether it's worthwhile to take advantage of that employer-offered 401(k) account. You can save for retirement with a 401(k) if you change jobs (and employers) often. But it can be tricky. Fortunately, you have several options when deciding what to do with your 401(k) when you leave your job and, by law, you have at least 30 days to make up your mind once you make the switch. Just be sure you understand the specifics, the challenges and all the available options for your retirement savings before you make a move. Challenges of Saving With a 401(k) if You Change Jobs OftenA 401(k) is a retirement savings and investing plan that many private employers offer to their employees. Employee contributions are typically withdrawn automatically from employee paychecks—pretax—and invested. Not counting your employer match, if available, you can contribute up to $20,500 this year to your 401(k) and make an additional catch-up contribution of $6,500 if the plan permits and you're over 50. As a nest egg for retirement, you probably don't want to just leave that money behind when changing jobs. Deciding what to do with your 401(k) can be challenging, however, and you may face a few barriers.
What to Do With Your 401(k) When You Change JobsIn all the excitement of changing jobs, your 401(k) retirement savings may be the last thing on your mind, especially if you're young. But considering you may need about 80% of your annual preretirement salary each year you're retired to maintain your current standard of living, it's worth taking a look at options to secure both your 401(k) and your financial future. Leave Your 401(k) Savings in Your Previous Employer's PlanSometimes the easiest option when you switch jobs is to leave your 401(k) with your previous employer. That's because you won't lose any contributions you've already made and your money will maintain its tax-deferred status until you withdraw it. Plus, if the plan has provided strong returns with low fees, leaving it alone can continue to pay off. This may also be a good short-term option if your total 401(k) contributions are more than $5,000 and you're between jobs or laid off. However, in the long term, if you keep your existing 401(k) and your new employer offers you a separate 401(k) plan, you may end up paying fees on two plans. Transfer Your 401(k) Savings Into Your New Employer's PlanYou may be able to transfer your existing 401(k) savings into your new retirement plan, but you may have to wait a bit. Some employers may require you to be on the job a certain number of days before you can enroll in a 401(k) plan. On the upside, transferring your existing 401(k) can make it easier to track your investments because they are all in one place. You can typically have the plan administrator of your old plan deposit your 401(k) balance into a new retirement plan directly, making the process hands off for you. You'll pay no taxes and your money will continue to grow tax-deferred. Alternatively, you may prefer an indirect rollover, where the balance is cashed out to you as a check. Keep in mind: If you choose an indirect rollover, you have 60 days to deposit the funds into another eligible retirement plan to avoid paying the mandatory penalty of 20% on the entire balance. Roll Your 401(k) Savings Into an IRAWhen changing jobs, you can also roll over your 401(k) to an IRA. You have a couple of different options, each with pros and cons and different tax implications. (More on that later.) Should I Cash Out My 401(k) When I Change Jobs?If you're changing jobs and need money, it can be tempting to cash out your 401(k) upon leaving. But before you do, it's best to understand the possible drawbacks. For example, the money you withdraw is taxable and at risk for a mandatory 20% federal withholding tax. Plus, the money will be taxed as ordinary income and can no longer grow. You might also face an early withdrawal penalty of 10% if you're under the age of 59½. But maybe the scariest outcome of cashing out your 401(k) is that you could be short of cash when you really need it—at retirement. Best Alternatives to Investing in a 401(k)Employer-sponsored 401(k) plans are great options for anyone planning for retirement. But if your employer doesn't offer a plan or a 401(k) doesn't suit your needs, there are alternatives to consider. Traditional or Roth IRAYour retirement savings can be rolled over into an IRA—either a traditional IRA or a Roth IRA—that can offer you some advantages for your money. Solo 401(k)If you're the sole proprietor of a business or independent contractor with no employees, you may opt for a solo 401(k). Like a traditional 401(k), your contributions are tax-deductible and earnings are tax-deferred. You contribute as an employee or employer, but employer contributions are capped at 25% of your net income and cannot exceed $61,000 in 2022. Any withdrawals you make are taxable, and you might pay a penalty if you withdraw funds before the age of 59½ unless you qualify for an exception. If you need cash early, you may be able to borrow limited funds without penalty if your plan allows. SEP and Simple IRAsAlong with traditional and Roth IRAs, you might also explore a Simple or SEP IRA, which are great options for small business owners and the self-employed. Contributions are generally funded by your business and are tax-deductible if you're self-employed. Although there's no option to make catch-up contributions after the age of 50, contribution limits are high. If you make a withdrawal in retirement, it will be taxed as ordinary income, but early withdrawals are subject to penalties unless you qualify for an exception. HSAHealth savings accounts (HSAs) are set up to help you pay for medical expenses and are only available if you have a high-deductible health care plan. They are portable and can stay with you if you change employers or retire. HSA earnings are tax-deferred and contributions are tax-deductible. You can withdraw money from your HSA at any time to use for medical expenses, but non-medical withdrawals may be subject to taxes and penalties. However, the HSA funds in your account carry over from one year to the next if you don't spend them, and might earn non-taxable interest. The Bottom LineIf you change jobs often, saving for retirement with a 401(k) can be challenging, but not impossible. Retirement has a way of sneaking up on you and it pays to be prepared when the day comes. If your new employer doesn't offer a retirement plan, there are other ways to save. And while you're at it, stay up to speed on other aspects of your financial health by checking your credit report at Experian for free. How do I transfer my retirement funds from one company to another?A direct 401(k) rollover gives you the option to transfer funds from your old plan directly into your new employer's 401(k) plan without incurring taxes or penalties. You can then work with your new employer's plan administrator to select how to allocate your savings into the new investment options.
Is it better to roll over 401k to new employer?Leaving your funds with your previous employer is “definitely an option,” he says, “but typically, the downsides mean it's not the best option.” If your new employer accepts rollovers, “this is a good option if you like the investment choices and the fees aren't too high,” Holeman tells CNBC.
Does 401 K change when you switch jobs?Key Takeaways. If you change companies, you can roll over your 401(k) into your new employer's plan, if the new company has one. Another option is to roll over your 401(k) into an individual retirement account (IRA). You can also leave your 401(k) with your former employer if your account balance isn't too small.
How do I rollover my 401k to a new employer?Rolling over a 401(k) to a new employer is fairly straightforward — you simply call the 401(k) provider at your old company and request the rollover yourself or your current employer plan can do it for you. The other option, which is rolling over a 401(k) into an IRA, is also a popular choice.
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