What Happens to My 401(k) if I Change Jobs?

Your New Job’s Effect on Retirement Savings

Changing jobs means updating more than just your LinkedIn profile. You also need to make decisions about your retirement savings. Whether you have a 401(k), or related employer sponsored retirement plans like a 401(a) or 403(b), it’s important to understand your options. Read on to learn what happens to your 401(k) when you change jobs and how to protect your retirement savings.

How To Move a 401(k) to a New Job

What makes the most sense for your 401(k)? Your previous employer, new employer, and stage in your career can affect whether you may need to transfer, rollover, or leave your 401(k) where it is. Compare the most common ways to manage a 401(k) with their own unique rules, benefits, and tax implications.

1. Rollover a 401(k) to a New Employer’s Plan

If you want to keep contributing to a single 401(k) plan, transferring your plan to your new employer can be an attractive option. First, you will need to check if your new employer accepts 401(k) rollovers. If they do, your provider can help perform a direct transfer or an indirect transfer to move funds over while avoiding taxes or penalties.

How Does a 401(k) Direct Transfer Work?

With a direct transfer, also called a trustee-to-trustee transfer, your previous employer will send money from your old 401(k) account into your new 401(k) via direct deposit. The benefit of a direct transfer is your 401(k) providers do the work for you, and you avoid risks like owing taxes or incurring an early withdrawal penalty.

How Does a 401(k) Indirect Transfer Work?

With an indirect transfer, your previous employer will send you a check with your retirement plan distributions. After you get the check, you must deposit distributions into a qualified account within 60 days. The risk of an indirect transfer is if you miss the deadline, you can be taxed on the entire balance and be hit with an early withdrawal penalty if you are younger than age 59½.

2. Leave Your 401(k) with Your Old Employer

If your former employer allows it, you can leave your 401(k) right where it is. When you leave a 401(k) with your previous employer it will continue to be invested. You can monitor or change investments, but the drawback is you won’t be able to make new

contributions to your 401(k). This can be a worthwhile option if your old employer’s plan has better investment options than your new employer.

Be aware, if your current 401(k) account has less that $7,000 invested, employers are legally allowed to transfer funds into an Individual Retirement Account (IRA) and you will no longer get their 401(k) plan benefits. Make sure to contact your plan’s administrator so you know what will happen with your retirement funds.

3. Rollover a 401(k) into an IRA

You can roll over your old 401(k) into an Individual Retirement Account (IRA), which can provide flexibility and control over investments. This can make sense if your new employer does not offer a retirement plan. You can choose an IRA based on contribution style—with tradition IRAs contributions are made with pre-tax dollars while a Roth IRA accepts contributions after-tax.

Your money doesn’t have to permanently live in an IRA. You can decide to rollover an IRA into an annuity or later move an IRA back into an employer 401(k) plan with what’s called a reverse rollover.

4. Rollover a 401(k) into an Annuity 

You can also transfer your 401(k) into an annuity. Rolling over a 401(k) to an annuity can make sense for older workers who are looking for a way to guarantee steady income in their retirement years that are around the corner.

How does rolling over a 401(k) to an annuity work? If you already have an annuity, you may be able to do what is call a 1035 exchange and move funds tax-free to your contract. You also have the option to move funds to a new annuity, subject to your existing 401(k)’s plan rules.

5. Cashing Out a 401(k)

BODY: You can cash out your 401(k), but it comes at a cost. Not only will the entire amount you withdraw will be taxed as income, but you could face a 10% early withdrawal penalty if you're under age 59½.

Preserve Your Retirements Savings for Your Future

We don’t have to tell you your 401(k) is a big deal. So, as you strategize your next career move, you should also have a smart strategy in place for your retirement savings. Whether you roll it into a new employer plan, an IRA, or even convert it into an annuity, the goal is to preserve and grow your savings so it’s ready when you need it.