What To Do With Your 401(k) When You Leave Your Job

I was speaking to a close buddy recently. We were talking sports, politics and most importantly finances. When we got onto the topic of retirement accounts, he said “I still have my 401(k) over at (firm that will not be named).”

It doesn’t sound so outrageous until I tell you that he had left that firm over 4 years ago – and HIS money is still sitting over there. I immediately thought to myself “how many people have no idea what to do with their 401(k)s when they change jobs?” Or to an even further extent, how to execute on anything even if they know what they want to do?

Shortly after that conversation I started typing this article because that is what we do here at ACM Wealth. We educate you. Our clients, readers, and followers.

So, first things first, as a refresher, a 401(k) is a retirement savings plan offered by many employers that allows you to direct a portion of your salary into a tax-advantaged investment account. There are a few options on how that money is contributed to your account (Pre-Tax vs Roth) but we will save that for another commentary. I want this article to focus primarily on the options you have with your 401(k).

Upon leaving a job, employees typically have a few options which I outlined in full detail 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) which will maintain the tax deferred status on those investments.This requires some effort but ultimately will provide you with the most control over your investments as well as a wider range of investment choices. Typically, with 401(k)s, you are limited to the menu of Mutual Funds that are offered by your plan. Most 401(k) plan participants invest in a “Target Date Fund”, which are widely available among employer retirement plans and which you may or may not understand how it’s actually invested.

In an IRA, you are able to purchase a plethora of securities including individual stocks and bonds. So, let’s say your neighbor down the street tells you about this new hot stock called Nvidia and you want to hop on the train and purchase some shares. You would be able to do so in your IRA. It is a bit tougher to do so in your 401(k) and that is if your plan even offers the option.

Rolling into your IRA can be most beneficial if you prefer a hands-on approach to managing your investments or if you are working with a financial advisor to tailor your portfolio to your specific goals. It also is advantageous if your goal is to consolidate retirement savings into one account and not have to keep track of accounts at multiple institutions.

Option #2 – Roll the funds into your new 401(k)
This is somewhat similar to Option 1 except instead of rolling it into your IRA, you are moving the funds into your new 401(k) at your new employer – again this is assuming your new plan allows it, which most typically do. This also can be a bit of a headache to deal with.

By rolling into your new 401(k), you will maintain the tax-deferred status and you may be eligible for employer matching contributions. Don’t sleep on those two things as they can seriously enhance your savings and growth potential.

On the downside, you will likely have similar investment options so you will be a more restricted in what you can own here.
The major benefit to this option comes via consolidation and it also preserves the ability to do back-door Roth contributions. My colleague, Robert Olsen, wrote about back-door Roth’s in extensive detail in a recent commentary at our website that I encourage you to check out.

Option #3 – Leave the funds in the plan with the former employer
The third option is the easiest and most convenient for people, which is to just leave the funds in the former employer’s plan like my friend. This is not the most common method and, at some point in the future, you will eventually have to make a decision on what to do with the assets, so you are really just kicking the can down the road.

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. I also could never get past leaving my money at a previous employer. But who knows, maybe you are planning on returning later on in your career!

“Alright, now I know my options. So, what do you suggest I do?”

The short answer is you should do whatever you are comfortable with and whatever is appropriate for your particular situation. Consulting with a financial professional is recommended in order to make the best decision.

More often than not though, most people tend to roll over their 401(k) funds into an IRA when they leave a job. As I mentioned earlier, this provides greater flexibility and control over your 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.

ACM Wealth is more than equipped with the knowledge, technology and service to help guide you to make the right decision. Please do not hesitate to reach out to discuss these options and any other questions you may have regarding your financial plan.

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