What Happens To Your 401(k) When You Leave Your Job?

According to a study by the Bureau of Labor Statistics in the US, the median number of years that wage and salary workers had been with their current employer in January 2020 was around 4.1 years. This indicates that most individuals tend to change jobs multiple times throughout their working lives.

While many people will debate about what that means about the changing landscape of the labor force, the first thing that I think about when I hear that is “I wonder what all these people do with their 401(k)s?”

When you leave your job, whether it is voluntarily or involuntarily, you are going to have to make a decision on what happens to your 401(k)-retirement account. As a refresher, a 401(k) is a retirement savings plan offered by many employers that allows you to elect to direct a portion of your salary into a tax-advantaged investment account. Upon leaving a job, employees typically have a few options for their 401(k) account which are outlined below.

Option #1 – Roll the funds into an IRA

Arguably the most popular option is to roll the 401(k) funds into an Individual Retirement Account (IRA). While this entails some effort, it does provide an individual with more control over their investments and offers more flexibility in terms of investment options. It is also an advantageous option if an employee has an existing IRA as this consolidates retirement savings into one account.

Option #2 – Roll the funds into your new 401(k)

Similar to option #1, another common decision employees make is to roll the 401(k) funds into their new employer’s retirement plan (assuming it is allowed by the new plan). This will ensure continued tax-deferred growth and potential employer matching contributions.

Option #3 – Leave the funds in the plan with the former employer

While not the most common option, some people decide to leave the funds in the former employer’s plan. While this choice is certainly the easiest and most convenient, it does come with its disadvantages. By leaving the funds with their former employer’s plan, employees may lose access to certain investment options or favorable fee structures as these are often tied to employment status.

How long do you have to decide?

Individuals generally have a few months to decide what to do with their 401(k) funds after terminating employment. The specific timeframe typically varies depending on the employer and their plan’s rules.

What do most people do?

Most people tend to roll over their 401(k) funds into an IRA when they leave a job. As stated above, this choice provides greater flexibility and control over an individual’s investment options. Consolidating multiple accounts into an IRA can also allow for better comprehensive retirement planning as it can encompass multiple 401(k) accounts from various different employers.

Overall, when employees leave their job, they have several options for their 401(k)-retirement account. Each option has its advantages and disadvantages and individuals should carefully consider their investment preferences, long-term goals and potential tax implications before making a decision. While many people choose to roll over their 401(k) funds into an IRA, it’s crucial to evaluate all available options.

Please do not hesitate to reach out to your ACM Wealth Advisor to discuss these options and any other questions you may have.

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