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

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Are you leaving your job soon?

Don’t even think about giving your job the title of “ex bae” until you figure out what you plan to do with your 401 (k).

Subscribe to Wealthy Women Weekly so you can get weekly investing and money tips to prepare you for the big day.

Note: Having a 401(k) doesn’t mean you can’t take advantage of other retirement accounts. Diversify your savings.

Here are a few great articles to help you build your retirement savings:

• How to Open a Retirement Savings Account for Your Kids and Help Them Accumulate $1M Before They Reach 50
• How to Reach Your Retirement Savings Goals
• IRS Extends 2019 IRA Contribution Deadline to July 15th

If you’re ready to learn how to invest and take control over your finances, check out these resources:

• Dividends Are a Queen’s Best Friend (Available on Amazon!)
• Tax-Free Dividend Queen
• May 2020 Dividend Queen Income Update

What is a 401 (k)?

A 401(k) is an employer-sponsored retirement plan that you can contribute to as an employee. If you’re adulting and working a full-time job with benefits, you may have access to a retirement plan such as a 401(k), 403 (b), 457, or Thrift Savings Plan offered by the federal government. Well, the 401(k) is one of the most popular retirement savings plans around.

One perk that many individuals enjoy in a 401(k) is that your company may provide a matching contribution. If you’ve heard people talking about the “free money” that companies give you for retirement, well this is what they are referring to. The 401(k) balance can grow at a faster rate because it can be a team (you + your employer) contribution effort that will help you increase your retirement savings.

Don’t think you can just get your matching contribution from your employer today and dip out on the company next year with all the money. It doesn’t work like that.

Many 401(k) plans require you to work for a certain length of time before you can access the full value of the matching contributions provided by your employer. This is known as vesting. Make sure you know your company’s vesting period/schedule and how it works before you break up with your job. Once you’re fully vested in the 401 (k) plan, you can take all the contributions made to your account if you leave for a new job.

As an employee, you can contribute to this plan before taxes are taken out your paycheck. But there is a limit to how much you can contribute each year. The contribution limit for employees who participate in 401(k) has increased from $19,000 in 2019 to $19,500 in 2020. If you contribute more than the maximum amount, you will be penalized. YIKES!

Why contribute to your 401(k)? Well, it gives you a chance to save money for the FUTURE you and the life you want to live when you retire. It also helps reduce your taxes. Every year you contribute to your 401(k), you reduce your taxable income and pay less taxes.

Have a Plan For Your 401 (k)

You have some sort of plan for your life, right? Well, you need to have a plan for your 401(k). Actively monitor your 401(k), determine how much you want to contribute each year, and identify the best investments for you based on your risk profile and goals.

Then, determine what you plan to do with your 401(k) if you plan to divorce your job.

If you have no idea what to do, take a look at these four options below:

Leave Your 401(k) with Your Current Employer

You can’t make additional contributions to your employer-sponsored 401(k) when you leave your job but that doesn’t mean you have to move your 401(k) someone else.

Based on the investment options that your 401(k) plan gives you or the low fees associated with the account, it might make sense for you to leave your 401(k) plan where it’s at. Do your research and determine what makes best for you.

Roll it over to a new employer’s plan

You can roll over your 401(k) plan to your new company. Make sure you compare the plans to make sure that’s the best decision for your portfolio.

Determine if you will do a direct or indirect rollover. A direct rollover is when the old employer writes a check to the new employer 401(k) administrator to transfer your entire balance. This process avoids taxes and penalties.

An indirect rollover is when your old employer writes a check to you. This method includes a mandatory tax withholding because the check is made out to you and you may cash out the account. You have 60 days to deposit the money into the new company’s 401(k) plan to avoid taxes and a 10% early withdrawal penalty on the entire amount.

When doing your research, make sure you are aware of the rollover exceptions.

Do an IRA rollover

When you transfer money from a 401(k) to an Individual Retirement Account (IRA), it’s called a 401(k) rollover.

What type of 401(k) do you have? This will impact the taxes associated with moving your money. If you have a traditional 401(k), you can move your funds into a traditional IRA tax-free. If you have a Roth 401(k), you can move your funds into a Roth IRA tax-free. But if you roll over a traditional 401(k) into a Roth IRA, you’re doing a “Roth conversion” and would have to pay taxes on this transaction.

Cash out

Generally, you can begin withdrawing money without penalties when you reach 59 ½. But you can access the money in your 401(k) at any age when you leave your job. Call the 401(k) administrator and have a check sent to you or money deposited in your account if you want to have the funds now.

Remember, if you withdraw money before you are eligible, you will be responsible for paying a 10% early withdrawal penalty and be subject to income taxes on the distributions.

Be Mindful of the 60-Day Rule

If you don’t pay attention to the timing rules associated with your 401(k) plan, you could be subject to taxes and penalties.

The 60-Day Rule states that you have 60 days from the date you receive an IRA or retirement distribution to roll it over to another plan or IRA. Review the IRS rules for more information.

Do you have a 401(k)? What do you plan to do with your 401(k) when you leave your job? How are you saving for retirement?

Let us know by leaving a comment below!

BIO: Charlene is currently the Chair of the Illinois CPA Society Taxation Individual Committee. With over a decade of experience in the financial services industry, Charlene is one of the few leaders who design insights specifically for the woman investor. Charlene’s work has been featured in a variety of publications including the Huffington Post, Black Enterprise, and the American Institute of Certified Public Accountants. In 2019, Charlene released her book “Dividends Are a Queen’s Best Friend”, on Amazon.

Disclaimer: Wealthy Women Daily is solely educational and informational, and is not intended to give investment or trading advice of any kind. Not all asset classes are suitable for all investors. Wealthy Women Daily is a research academy that provides you with the data and analysis you need to make an informed investment decision. It is your responsibility to talk to an expert to understand how specific investments will impact you during tax time.  Affiliate links are included in this article.