What to do With Your 401(k) When You Change Jobs

Written By Jeff Hindenach
Last updated December 11, 2020

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February 9, 2016

Simple. Thrifty. Living.

The nature of building a career in today’s marketplace often involves switching companies as your skills and ambitions grow. If you’re about to change your place of employment, you may be wondering what will happen to those tax-deferred funds in your current 401(k). There are three good choices you can make depending on your particular situation, and one choice that’s not as good.

This option might not be available to you, depending on how much you have in your current 401(k). Businesses usually have a minimum balance, such as $5,000, for 401(k) accounts belonging to former employees. If you have enough in your account, leaving your 401(k) where it is may be your easiest choice for the moment. It’s a helpful option if your new place of employment requires you to work for a certain length of time before you can participate in its 401(k) plan. If you decide to leave your funds with your former employer for a long time, you may have to withdraw them when you reach the age of 59 1/2.

This is a seamless process in which your tax-deferred funds are handed over directly from one custodian to the next. You don’t have to pay any income tax or penalties when you request this transfer. Some employers let you make this transfer right away, but in other cases, as we mentioned above, you might have to wait until you qualify for a 401(k) at your new workplace.

If you decide that your professional life probably won’t involve a long-term association with one single employer, you may prefer to save for retirement with a personal IRA. You can request that your previous employer roll over your 401(k) balance directly into your personal IRA, and you won’t have to pay any income tax or penalties for this transaction.

This is the “less good” choice we mentioned above, and it’s only worth considering if you’re in some type of financial emergency. In many cases, your employer may have to withhold 20 percent of your account balance to cover your potential income tax obligations. Furthermore, if you’re under age 59 1/2, you generally have to pay a 10 percent penalty on this early cash distribution.

A new job brings important changes to your whole financial scene; it’s a good feeling to know that your accumulated retirement savings will continue to grow tax-free as you move forward in your career.

About the Author

Jeff Hindenach

Jeff Hindenach is the co-founder of Simple. Thrifty. Living. He graduated from Bowling Green State University with a Bachelor's Degree in Journalism. He has a long history of financial journalism, with a background writing for newspapers such as the San Jose Mercury News and San Francisco Examiner, as well as writing on personal finance for The Huffington Post, New York Times, Business Insider, CNBC, Newsday and The Street. He believes in giving readers the tools they need to get out of debt.

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