You have decided to quit your job and find something else. You are nervous, anxiety is probably through the roof, and your mind is solely focused on the new job. However, you forgot something…Your 401(K) account from your previous employer. You have all that money sitting there, so what do you? In addition, what happens to your 401(K) after you quit? This is what this article will aim to answer.
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What Happens to Your 401(K) After You Quit?
When you quit your job, your 401(K) will not quit with you. It will remain under your former company’s umbrella. However, do not fret about that. The money in the account is still yours, sort of, anything vested will be yours and anything not vested will go back to the company. Now, there are some rules to this when cutting ties with an employer.
First, if you contributed less than $5,000 while you were with that particular company, they can legally inform you that the money in your old 401(K) account has to go somewhere else and cannot remain under their care. The reason being, it costs the company money to maintain your 401(K) account. Since you are no longer an employee, they no longer wish to foot the bill for that.
Secondly, if you contributed between $1,000 and $5,000, your former employer might move the money for you on your behalf. They will move your money to an IRA account, and this kind of move is called an involuntary cashout.
Lastly, if you contributed less than $1,000 towards your 401(K) account, the company will just mail you a check for that amount. This is the easier option for everyone involved. However, do not keep that $1,000! Put it into a retirement account ASAP or the IRS will tack on a penalty and fees to your withdrawal.
So what should I do now?
There are a few options you can choose from going forward. Usually, if your old employer does not mind, your contributions can remain in your old account. However, check out the following before deciding to leave it there:
You could withdraw the money
You are allowed to withdraw your money from your old 401(K) account, however, unless you are in dire financial trouble and need the cash, I would suggest leaving it there or moving it to your current employers account. Withdrawing your money early comes with a big penalty and fees from the IRS. Usually, the IRS will use 10% as their basis for their tax on the withdrawal.
Or you could do nothing
Me personally, I like to have everything under one roof but if you do not mind having multiple 401(K) accounts then you could do nothing. If your old employer does not mind, you can leave the money in the account and simply move on with your life. Your old account will grow and take hits as normal and when you retire, you will get a check from that account plus your current one.
However, I would recommend you keep your all accounts under one roof, as it will make things easier for you in the future. In addition, if you have a financial advisor, it will be easier for them to determine your finances correctly and give you better advice.
Rolling it over
When you start your new job, check and see if they offer a rollover with their plan. Most companies offer this and if they, it might be wise to combined your 401(K) accounts. A rollover might be a good choice especially if your new 401(k) has particularly low fees or unique investment options. The process is pretty simple, all you have to do is call your new 401(K) account and tell them you want to rollover your old account and they will explain everything for you.
There is no right or wrong way to manage your 401(K) account or accounts if you have multiple. I would suggest researching and do what is best for you. Do what will align with your financial and life goals. This is your life; you know it better than anyone else does so you make the decision.