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New Job? What Can You Do with Your Old 401k?

Learn some of the options that are available with your 401k when you leave a company and how you can use that money for self-directed investments.

Posted on March 4, 2024 by Rebecca Parker

401k rollover

After leaving a job, you may be wondering what you should do with your old 401k funds. There are a few options to consider and each has its own pros and cons. No one option is perfect for everyone, so it's helpful to reflect on your specific situation with your financial planner to discuss the best choices for you before moving any funds. Let's compare the three most popular options of what to do with your 401k investments when you leave an employer.

1. Move the funds into an IRA

A major effect of leaving a job, whether it be through retirement, layoffs or simply moving to a new company, is that your 401k from your previous employer becomes eligible to be rolled over to an Individual Retirement Account (IRA). You have the ability to continue investing those funds on your own in an IRA or Self-Directed IRA without experiencing any tax repercussions.

One thing you would want to consider is what type of investment you plan on doing because this will help you determine the perfect custodian for your needs. Some people choose to put their money in a regular IRA and hand their money to a financial advisor to choose their investments for them. Others choose to take control and invest with a Self-Directed IRA at a non-traditional custodian that will hold private assets.

You may be asking what is the difference between those two types of IRAs? A Self-Directed IRA is simply an IRA in which the owner directs all investments in the account. There is no legal distinction between a “Self-Directed IRA” and any other IRA except with a truly Self-Directed IRA the account agreement allows the broadest possible range of investments options, which could include real estate, private or start-up companies, promissory notes, oil and gas, and more.

Another advantage of rolling over the funds into an IRA is there is no limit to the amount you can rollover. Usually when you open an IRA, there are limits to how much you can contribute each year. (See current contribution limits.) However, when you rollover funds from another retirement account into your IRA, there is no limit. This allows you greater options with the investments you can purchase and hold within your IRA.

2. Leave the funds in a 401k

If the thought of dealing with your 401k is too overwhelming, you may have the option to leave the funds right where they are. Some employers allow you to keep your plan with them even if you no longer work for them. Even though you’re unable to contribute to the account, or take a loan, your money can still be invested and grow tax deferred, however, you may have limited investment options.

If you have a low balance in your account, leaving the funds with your previous employer may not even be an option. And if the balance is very low, they may just give you a lump-sum distribution of the entire balance. This could expose you to taxes and penalties if you do not rollover those funds to another qualified retirement plan in a timely manner. If you decide to leave your funds with your old employer, it's important to make sure you understand the restrictions., review your account regularly, and keep the beneficiaries up to date.

If your new company has an employer plan, you may be able to transfer the money into that plan. The benefit of this would be to consolidate your 401k funds in the same place making it easier to manage. Your money would still be in a tax-advantaged retirement account and have the opportunity to receive employer matches, if that is something they offer. However, not all employers will allow you to rollover funds from a previous employer’s plan, so contact the HR department of your current employer to verify. Compare management fees, restrictions, and investment options between the two plans to determine if it's beneficial to transfer your account.

3. Distribute/withdraw funds

During this time, if you need funds to help cover costs like a mortgage payment and immediate expenses, you may be considering taking money from a 401k account. Cashing out is usually only utilized as a last resort option.

Using 401k funds now to pay for expenses could mean that later you won't have enough retirement savings. The funds in the account won’t be given a chance to grow during the next decades to build up for your future retirement. Also, you may be subject to a 10% withdrawal penalty if you are younger than 55 or between 55 and 59, but still working. The rule of 55 states if you leave your job and retire during or after the year you turn 55, you can withdraw your funds from your 401k and 403b plans penalty free. (This rule does not apply to withdrawing funds from an IRA.) You can avoid the 10% fee if you are older than 59½ or you are between 55 and 59 but are retired.

What you withdraw will be counted as taxable income and may bump you to a higher tax bracket. If you need to supplement your income until you have a steady stream once again, most advisors suggest only withdrawing the absolute minimum necessary and rolling over the rest into an IRA.

How Do I Rollover My 401k to an IRA?

You have two options when rolling over your funds from a 401k to an IRA. If your employer writes a check directly to you for funds in your 401k, this is considered an "indirect rollover". You have a 60-day time frame to deposit those funds into a new qualified plan. If you fail to do so, those funds will be considered income and will be subject to taxes, as well as a 10% early-withdrawal penalty if you are not 59½ yet. Furthermore, the IRS requires that your employer withhold 20% of the funds just in case you don’t make the deadline, so they are guaranteed their tax money. If you make the deadline, however, you should receive the 20% back when you file your income taxes. You can avoid all of this by doing what’s called a “direct rollover” from the 401k account into your new IRA account. A direct rollover is usually done electronically as long as you have an account set up with a qualified institution already. Just contact your previous employer to get the ball rolling.

Whether you've left a job by choice or involuntarily, it can be easy to lose track of old 401k plans, especially if you have worked for multiple companies. By reviewing your options and making a decision what to do with your 401k account soon after separation from your job, you can stay on track to reach your retirement goals and make those funds work for you.

At Quest we are here to provide education no matter what option is best for you. With our weekly webinars featuring investing education and our certified IRA specialist just a call away, we want you to be able to make your decision with confidence. To learn more about how to get started investing with a Self-Directed IRA, schedule a 1-on-1 consultation with an IRA Specialist.

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