What to Do With a 401(k) When Changing Jobs

February 1, 2019by Brian Fry CFP®
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You’ve left your job but still have a 401(k) plan with your former employer… now what? You have four options on how to move forward. These options include: do nothing, roll into your new employer’s 401(k) plan, roll into an individual retirement account (IRA) or cash out immediately. As a fiduciary financial planner in Austin, I will highlight the pros and cons of each choice below to help you make an informed decision.

What to Do With Your 401(k) When Changing Jobs

1. Do nothing. Keep retirement assets in your former employer’s 401(k) plan

Pros: Assets stay tax-deferred. This option requires the least amount of effort and offers a high level of protection against creditors. 401(k)s allow penalty-free withdrawals at age 55. 401(k)s allow you to delay taking required minimum distributions (RMDs) if you are still working at age 70.5.

Cons: Investment options may be limited. 401(k)s typically come with high fees and little transparency in how the fees are shown. Doing nothing may make your financial plan harder to track by adding an extra account.

2. Roll your former employer’s 401(k) plan into your new employer’s 401(k) plan

Pros: Assets stay tax-deferred. 401(k)s offer a high level of protection against creditors. These plans allow penalty-free withdrawals at age 55 or delaying taking RMDs if you are still working at age 70.5. Your current employer’s 401(k)s may allow you to borrow up to $50,000 against your account. Rolling into your new employer’s 401(k) may make your financial plan easier to track by having removing an extra account.

Cons: Investment options may be limited. 401(k)s typically come with high fees and little transparency in how the fees are shown.

3. IRA Rollover: move your former employer’s 401(k) plan into an IRA

Pros: Assets stay tax-deferred. IRAs offer great flexibility for finding the investment options tailored to your needs. IRAs offer great transparency in how fees are shown. Costs within an IRA are significantly lower than a 401(k).

Cons: Rollover IRAs typically don’t offer the same level of protection against creditors as a 401(k). IRAs don’t let you borrow against the account. IRAs require waiting until age 59.5 or later for penalty-free withdrawals. RMDs must be taken from IRAs at age 70.5.

4. Cash out your former employer’s 401(k) plan.

Pros: Assets are accessible immediately.

Cons: Taxes are due immediately. When grown for future use, assets do not grow tax-deferred. The cash out strategy can push your taxes much higher.

How to Best Move Forward

Deciding what to do with your former employer’s retirement plan depends on your unique situation. Weigh the pros against the cons and consider how the strategy fits within your financial plan. All employer retirement plans are different, just like all financial plans are different.

In most cases, rolling the 401(k) into an IRA has been the recommended option for clients I have worked with. Given everyone’s situation is unique, my recommendation is to consult with a fiduciary and fee-only financial advisor that can serve in your best interest. 

For More:

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What is a Financial Fiduciary?

Nerdwallet: How to Find an Old 401(k) — and What to Do With It

 

Austin Financial Planner and Fiduciary

Do you still have questions in deciding how to best move forward financially when changing jobs? Meet with a fiduciary financial planner in Austin, TX or online.

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by Brian Fry CFP®

Safe Landing Financial is an Austin, TX fee-only financial advisor providing financial planning, retirement planning and investment management to individuals and families. When you work with Safe Landing Financial, you work with Brian Fry, a fiduciary and CERTIFIED FINANCIAL PLANNER™ that puts clients’ best interests first. Financial planning services include: retirement planning, charitable giving, asset protection, estate planning, saving for college, debt management, tax strategy and investment management. Safe Landing Financial is located in Round Rock, TX and offers in-person financial planning in Austin, Cedar Park, Georgetown and Pflugerville, Texas. Safe Landing Financial serves as a virtual fee-only financial advisor to individuals and families nationwide.