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6/14/2021

401(K) Rollover Options When Changing Jobs

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Changing jobs periodically is the norm. An estimated 20% of Millennials move to a new position and switch companies per year. While adapting to the various changes that come with a new job, an important consideration is how to best handle an existing 401(k). 

When leaving a job, there are four options of what can be done with an existing 401(k). 

  1. Cash – Out
  2. Leaving the Account As-Is
  3. Roll Over to New Employer
  4. Roll Over to an Individual Retirement Account (IRA)

Cashing out is the least recommended option of the four choices. 

The individual cashing-out is usually taxed and fined an early withdrawal fee. In addition, the savings growth on those funds begins from zero again if reinvested, losing potential gains. 

The second option of leaving the existing 401(k) account with the previous plan company and doing nothing appears to be the simplest approach. However, you should investigate the fees associated with that account. Are the account fees higher or will they change after you separate from employment? Take into account that even a quarter of a percentage in fees can add up to $50,000 lost in retirement savings for someone contributing $10,000 per year over a lifetime. If you changed employment several times, numerous accounts might accrue. Keeping track of various accounts will be more complicated when strategizing for the future. 

Rolling an existing 401(k) account to a new employer plan is another option. This helps you save more and adds up over time. In some cases, employer plans offer limited investment options and have differing fee structures. Generally, the advantage of an employer 401(k) is the employer contribution or match based on the percentage of the money you put into the 401(k) plan. However, rollover funds would not qualify as a match.

The fourth option, rolling over a current 401(k) into an Individual Retirement Account (IRA). This allows an individual the ability to choose from a variety of investments and fees/expense ratios. If your new employer doesn’t offer a retirement plan, pension or 401(k), an IRA might be an option for your primary retirement saving source. You can select from a Roth or a Traditional IRA. IRA accounts can be opened at banks and investment firms.  

Regardless of your choice, saving will be beneficial.

Important Note: Nothing in this article constitutes investment, tax and/or financial advice. All investments have risks and may not be suitable for everyone. You should seek advice from an independent financial advisor. The mention of products, services, and business in this article does not constitute an endorsement or recommendation.


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