Nearly everyone who has worked at a corporate job at some point in their career has accumulated funds inside a 401k(or equivalent). Some companies open them for employees automatically and contribute regardless of what the employee does. Some companies offer a match based on the employee’s contributions. The rules of 401k accounts vary, but the idea is the same: you probably have one at your corporate job, or you’ve had one before. When you leave a job, your 401k stays with the company. What are your options for the 401k at that point? Can you complete a rollover to another company or cash it in? What other options are there? I’ll explain your options here. Most of these options use the same paperwork to complete but you simply edit one small section within the form.
1. Cash it in
I have seen circumstances where this option is the ONLY one available to you when you leave a job. This scenario is typically dependent on your 401k balance being below a certain threshold(like $10,000 for example). If you don’t meet the minimum threshold, you’ll receive a check in the mail regardless of whether or not you wanted to do anything else with it. Depending on how the check is made payable, you might not have any other options. However, if you do meet a threshold and aren’t forced to cash it in, you can still opt for this payout method anyway. Most advisors speak against this method due to taxes and possibly income tax bracket ramifications. Depending on your circumstances, this might make sense if it won’t boost your income tax bracket or if it allows you to pay off a high interest debt. I’ve known plenty of people who take the cash option simply because they don’t know what else is out there. If that’s you, read on!
2. Rollover
I’m a big fan of this one for several reasons that I’ll highlight on another post. Here, I’ll simply explain it as an option. With a rollover, you directly transfer your 401k from one institution and place it into an IRA or another 401k. You can roll it over into various types of accounts, including: annuities, IRAs, a new 401k, and a few others. There are no tax consequences for doing a rollover as long as the tax treatment is the same(for example, if you transfer from a pre-tax 401k into a traditional IRA. Rolling it from a pre-tax 401k into a Roth IRA would spark a tax consequence, and potentially a big one at that). You aren’t required to finish this task within a certain number of days after you leave a company. You can complete a rollover whenever you’re ready. Keep in mind that the company that holds your 401k is not going to be the same company you worked for in 99% of cases. So, if you left your job in such a way that you hate their guts and want absolutely nothing to do with them or anyone affiliated with them, your 401k is with a separate company altogether. You shouldn’t include your 401k custodian(company) in your black list simply because you hated your job. That’s like hating the brand of car you drive and deciding to hate the mechanic who helped keep your car running.
3. Leave it where it is
While I’m personally not a fan of this option, it’s still an option. To complete this task, you don’t need to do anything. You simply handle all tasks/paperwork related to leaving your job and ignoring all paperwork related to your 401k. Now, I can’t guarantee that you won’t need to talk to the old company’s HR department if you need any assistance with your 401k. Hypothetically, you should be able to contact the 401k custodian directly without needing to involve your old company, but it doesn’t always work like that. You may be thrilled with how well your 401k has performed and you want to keep it there, and that’s fine--You can do that. You’ll still have to pay some type of management fee or annual fee to leave it there. Those fees are usually higher than they would be if you rolled it into an IRA. There is also no tax consequence for exercising this option. If you never withdraw from it, you’ll never see a tax bill until it’s time to take the IRS “Required Minimum Distributions” or RMDs.
4. Convert to an income stream
I could put this as a sub-point to #2, because you would need to roll the 401k into an Income Annuity to exercise this option. That, or periodically make withdrawals as you needed funds. I’d highly encourage you to speak with a representative who knows your financial situation before deciding to use this option. It might be a great move for you. This is a perfect example(like many on my blog) of needing to talk to someone about your specific situation before making a decision based on general advice to a wide audience.
There you have it! Those are your options for your 401k after you leave a company. Your HR rep probably won’t have a good understanding of these options, so I wouldn’t count on them to help you decide what to do. That’s where a trusted financial advisor can help you. If you don’t have one, find one.
