Are You Aware Of What Happens To Your 401(k) If You Quit?
Does that look like what you’re seeing? Having left behind your old job, you can now look forward to a brighter future. Whether you are just about to take the next step or are looking for new opportunities right now, it is time to move on.
The 401(k) from your old job, and the money you invested there, hang out in the corner of your eye. The question is, what happens to your 401k when you quit your job, and what should you do?
A Brief Overview of 401(k)s
401(k) plans are retirement accounts that allow you to save for retirement as well as benefit from tax advantages. Roth and traditional (aka pre-tax) accounts are the two main types.
In order for you to have a 401(k) plan, your employer must set it up and allow you to participate in it. You are able to contribute directly from your paycheck to your 401(k). In addition, your employer may match your contributions to your 401(k) plan – meaning that they will contribute to the plan on your behalf.)
How Does Your 401(k) Plan Change When You Leave Your Company?
Due to the fact that 401(k)s are tethered to employers, you cannot contribute to them after leaving your employment. Generally, however, the money you already have in your account is still yours, and you can keep it there for as long as you want.
A first point to keep in mind is that if you contributed less than $5,000 to your 401(k) during your tenure with the employer, they may refuse to give you your money back. (They charge for administering your account.) Contributions below $1,000 will be mailed as a check, which you should deposit into another retirement account as soon as possible to avoid federal taxes (see below). If you contribute between $1,000 and $5,000, it is considered an involuntary cash out by your employer.
As well, if you had a 401(k) match, your contributions would be fully vested before you left if you fully vested before leaving. Otherwise, your employer would take back any unvested contributions. If you put the money in yourself, it is 100% yours.
Where Do You See Yourself Going Next?
The 401(k) contributions you made in your old account can usually be retained, but is that a good idea? The answer depends on your situation.
Money Can Be Withdrawn From The Account
You can technically withdraw money from your old 401(k), but unless you’re in dire straits, we don’t recommend it. The IRS would impose massive penalties on you for doing so, and you’d probably owe taxes on the money too – amounting to as much as half of what you have in your account.
The Situation Could Not Be Changed
In the case of people who contributed more than $5,000, they are not required to do anything. This is also true if your former employer allows you to keep your old 401(k). Likewise, if you have a low fee for investing or do not have access to the same investment options through a new employer’s 401(k) or an IRA, it might make sense to keep the account.
It is also possible that you will lose tax benefits if you move the shares in your old 401(k) if the stock is from your old employer. Talk to your tax advisor about exactly how to handle those assets.
