Does Your 401k Continue to Grow After Leaving Job
Look — what's that? Oh hey, it's the bright future ahead of you now that you've left that old job behind. Time to move on to new opportunities — whether they're waiting for you right now, or you're about to take some time to discover your next step.
But there's one slice of your old job hanging out in your periphery — that employer's 401(k), and all your money invested in it. So what's going to happen to that account, and what do you need to do next?
A quick 401(k) recap
Just to make sure we're all on the same page: A 401(k) is a type of investing account that lets you put money away for retirement with some sweet tax benefits. There are two main varieties: traditional (aka pre-tax) and Roth.
If you have a typical 401(k), it's because your employer hooked you up and made it available for you. Any contributions you make to your 401(k) come directly out of your paycheck. (You might also get a 401(k) employer match — meaning your employer puts some money into your 401(k) on your behalf.)
What happens to your 401(k) when you leave?
Since your 401(k) is tied to your employer, when you quit your job, you won't be able to contribute to it anymore. But the money already in the account is still yours, and it can usually just stay put in that account for as long as you want — with a couple of exceptions.
First, if you contributed less than $5,000 to your 401(k) while you were with that employer, they're legally allowed to tell you, "Your money doesn't have to go home, but you can't keep it here." (It costs them money to maintain your account, after all). If you contributed less than $1,000, they might just mail you a check for that amount — in which case you should deposit it into another retirement account ASAP so that you don't get hit with a penalty from the IRS (more on that below). If you contributed between $1,000 and $5,000, your employer might move your money into an IRA, which is called an involuntary cashout.
Also, if you had a 401(k) match, then you only get to keep all of that money if the contributions had fully vested before you left. If not, your employer would get to take back any unvested contributions. (Of course, any money you put in yourself is always 100% yours.)
What steps should you take next?
Usually, your 401(k) contributions can stay put in your old account, but does that mean they should? The answer is that it depends, but you've got options.
You could withdraw the money
Technically, you're allowed to withdraw your money from your old 401(k), but unless you're facing some really dire financial circumstances, we advise against it. That's because you'd get hit with big penalties from the IRS and likely owe taxes on the money, too — which could all add up to as much as 50% of the balance in your account. Yeah … ouch.
You could do nothing
If you made more than $5,000 in contributions or your former employer says they're OK to stay in your old 401(k), you aren't required to do anything. And if that account gives you access to investment options with really low fees or really unique investment options that you wouldn't be able to get with a new employer's 401(k) or an IRA, it might make sense to leave it alone.
Also good to know: If your old 401(k) contains shares of your old company's stock, check with a tax pro about what to do with those assets, specifically — you could be giving up tax benefits if you move them.
You could roll it over into a new retirement account
There are a couple of reasons why you might not want to leave your old 401(k) where it is. The first is for your own sanity. The more investment accounts you have, the more logins you have to remember, tax documents you have to wait for, and addresses and beneficiaries and email addresses you have to update when those things change.
The second reason is that when you have all your investments in one place, together, it's a lot easier for your advisor to help you make sure that your investment portfolio is properly diversified and forecast whether you're on track to hit your goals, like we do for you at Ellevest.
If you're starting up with a new employer that offers a 401(k) and their plan allows it, then you might be able to combine them by rolling your old 401(k) over. A rollover might be a good choice if your new 401(k) has particularly low fees or unique investment options. But if you don't have access to a new 401(k), or if you want more choices about what kinds of things you invest in or the fees you'll have to pay, then you could roll your 401(k) over into an IRA instead. (Yep — we do that at Ellevest.) Here's an article that lists out the pros and cons (and rules) of those two options.
There aren't really any "wrong" answers — no matter what you do with your old 401(k), the fact that you're thinking about the options and making a decision means you're looking out for Future You. And that's really what this is all about.
Disclosures
We're hard at work improving our 401(k) and 403(b) process to make it even better for you. Every rose has its thorn, though, and we regret to tell you that we can't accept any new rollovers until those improvements are done. Check back soon, and if you have any Qs, you can always email us at support@ellevest.com.
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Source: https://www.ellevest.com/magazine/retirement/401k-when-you-quit