What to do with your 401(k) when you're leaving your job

An estimated 16 million Americans who’ve left their jobs have also abandoned retirement-account assets, usually because it was a relatively small amount they simply forgot. Does that seem incredible? Perhaps. However, if you suddenly become unemployed, you too may find yourself way more focused on the job hunt than your retirement savings sitting with your former employer. Consider focusing on both your next career move and a revised 401(k) strategy, so you can maintain your short- and long-term financial goals.

Brad Markwell, a Thrivent financial advisor based in Golden Valley, Minnesota, has worked with many clients managing their investments during a career transition and offers this perspective on a sudden job change when you’re perhaps least prepared to deal with an investment issue: “You’ve worked at a company for 25 years, and you've never had to deal with this. And suddenly, you're like: What am I going to do for health insurance, how am I going to pay my bills? Once you recover from that shock, you then need to get educated quickly about the options you have and how you make the most of this unfortunate event.”

Markwell cites the pros and cons of each potential approach to managing your retirement funds by discussing each of these topics:

1. Can I leave my 401(k) with my former employer?
2. Can I bring my 401(k) funds to the plan at my new job?
3. What are the advantages of rolling over a 401(k) to a traditional IRA?
4. What are the disadvantages of rolling over a 401(k) to a traditional IRA?
5. Why should I consider rolling over my 401(k) assets into a Roth IRA?
6. How a Roth IRA conversion can leverage currently low tax rates.
7. Can I cash in all or part of my 401(k) if I need additional emergency funds?
8. How to get emergency cash from your 401(k) and keep on investing.

Yes. You can leave your 401(k) with your former employer if you have a balance of $5,000 or more. This could be an appealing alternative—especially if you’re busy filling out job applications and interviewing. But does it make good financial sense? We explore the pros and cons below:

If you’re happy with how the investment options are performing in your former employer’s retirement plan, this may be the most convenient choice. However, be sure to reevaluate your picks on a regular basis, such as quarterly, to make sure they suit your overall strategy.  

Get the mental space you may need to focus on more immediate concerns.

It may provide a wider range of fund options and features than a potential new employer’s 401(k) offers, such as possibilities for loans and creditor protection.

Since your former company administrates the retirement plan, you’ll only be able to select funds from the options they provide. For example, if you’ve read some great information about a mutual fund that focuses on sustainable agriculture but your plan doesn’t offer it, you’ll need to go elsewhere to invest in it. “You're losing the flexibility that you could have with a traditional or Roth IRA,” adds Markwell.

Former employees can’t continue to contribute to a workplace retirement plan or receive matching funds. “And you may also receive fewer overall investment features and benefits, at your former employer’s discretion,” says Markwell.

Yes. You can transfer your current assets from your old 401(k) plan or your transitional IRA without having any tax consequences, provided the new employer’s plan allows for rollovers. This is called a direct rollover. It’s another way to continue enjoying the benefits and ease of a 401(k) plan. Consider these pros and cons of transferring these assets to your new employer's plan:

With everything in one place, you’ll have less to manage, and you’ll be able to begin contributing to your new employer plan once you’re eligible. You’ll also then be entitled to any employer matching contribution if it’s offered.

Your new employer’s plan may have different investment options, loan options, protections against potential creditors, or other benefits that better suit your needs than your former employer’s plan. If you continue working until and beyond your required beginning date (RBD), you may be excused from required minimum distributions (RMDs) if your new employer’s plan allows it.

Account fees and investment thresholds vary from plan to plan, so be sure to inquire about these before deciding to bring your 401(k) funds to your new job.

Check on the new plan’s fees and expenses. They may be higher than your former employer’s.

Your employer still controls what funds are offered, changed, or eliminated. Compare the fund offerings to your current lineup to ensure that you have at least the options you’ve enjoyed with your former employer’s plan.

If you were buying your former company’s stock, you might not be able to transfer it to your new 401(k) plan. Consult your previous employer’s benefits department and your accountant to discuss the plan particulars.

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What to do if you've been laid off

Getting laid off can be devastating. As you grapple with finding your next step, you also likely have questions about the financial impacts of losing your job. One piece of good news: There are some immediate, short-term and long-term actions you can take to help you through this difficult time. 

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The advantages of rolling over your 401(k) to a traditional IRA include enabling you to invest in a wider choice of funds, consolidating multiple 401(k)s into one account and investments potentially growing tax-deferred. This rollover is typically penalty-free.

• You can invest with a wider choice of funds tailored to your goals, interests, and risk appetite.  Unlike the typical 401(k), an IRA comes with the ability to select asset types—and possibly additional investment guidance individually. A broader range of available assets and types may include individual stocks and bonds, CDs, index funds, target-date funds, goal-specific mutual funds, and real-estate investment trusts (REITs). "Pick what types of investments make sense for you and your future,” says Markwell.

• You can use the IRA to consolidate multiple 401(k) rollovers in a single, easy-to-manage account. The average American switches jobs 12 times in their career. If you are at or near that average, you may want the flexibility of having your own retirement account that stays the course. This also gives you a permanent parking spot for any future employer-plan rollovers.

• Your investments grow, tax-deferred. Enjoy the tax benefits of pre-tax investments.

The disadvantages of rolling over your 401(k) assets to a traditional IRA include lower contribution limits than a 401(k), the potential for higher administration fees and no ability for loans.

• You can’t contribute as much as you can to a 401(k). In 2024, for example, the IRS is capping annual IRA contributions at $7,000 ($8,000 if you’re 50 or older), as compared to $23,000 ($30,500 for those 50 or older) for a 401(k).

• You may pay more. Account administration fees may be higher than your existing 401(k) plan.

• You can’t take out a loan. Unlike a 401(k) plan, loans are not allowed in an IRA.

A Roth IRA conversion lets you invest your taxed income in your retirement.

The advantages of a Roth IRA include all of the benefits of a traditional IRA listed earlier. In addition:

• You decide when to withdraw money. Roth IRAs have no required minimum distributions (RMDs) but beneficiaries are subject to distribution rules.
• You may worry less about taxes. All future earnings grow tax-deferred and may be tax-free if the account is at least five years old and you are older than 59½.²

All the downsides of a traditional IRA also apply to a Roth IRA, in addition to:

• You’ll pay taxes now. Since you didn’t pay tax on your 401(k) contributions and earnings, you’ll need to now. However, if tax rates are significantly higher in your retirement, you could benefit over the long term.

One of the potentially overlooked silver linings of the past year’s economic challenges is a favorable income tax environment created by the 2017 Tax Cuts and Jobs Act. If you’re considering a Roth IRA conversion¹ from your 401(k), you’ll be paying some of the lowest tax rates in history on those converted assets and doing it all at one time. However, if you went with a traditional IRA rollover, you may pay higher taxes in retirement on your RMDs.

“If you’ve lost your job, or your income level drops, you can convert your 401(k) assets at your new, lower, tax bracket. Say, for example, you convert your 401(k) assets to a Roth IRA, you may be paying taxes at a reduced rate right off the bat,” explains Markwell. “And if taxes rise between now and your retirement target date, at which time you’d otherwise take distributions, you will have further benefited tax-wise from that earlier conversion.”

Keep in mind that establishing an IRA with efficient growth goals may call for more active management on your part, depending on your retirement goals. A financial advisor can help tailor your investments to your individual strategy and also help you revisit and refine that plan as needed.

• Learn more: Is paying taxes on a Roth conversion worth it?

Yes. You have the option of cashing in your retirement plan, but you should consider it a last resort. You may be considering a cash-out because you lost your job, and you’re going to deplete your emergency savings.

• You’ll get access to quick cash. You’ll get immediate short-term financial assistance.
• You’ll avoid future financial obligations. Using your own funds instead of taking out a bank or private alone means no vetting and no future loan payments.

• You’re losing investment potential. A large loss of accrued gains can impact your retirement plans.
• You’re incurring tax and penalties. The IRA charges a mandatory 20% withholding on any distribution from the plan that is otherwise eligible for rollover. Taxes will apply, as well as a 10% penalty if you are under age 59½. If you are 55 or older in the year you terminated service, the 10% penalty is waived.
  

With a partial cash withdrawal, you would first roll all of your 401(k) funds into an IRA. By leaving part of your funds in a cash position within the IRA, you have cash as needed. Meanwhile, you can invest the remainder as per your retirement strategy. “It’s really an option of last resort. However, a partial approach makes the most of a dire situation,” says Markwell.

No matter what options you consider or eventually choose, Markwell has this advice to offer: “One of the advantages of working with a financial advisor during a career transition is that you can reduce your stress level and emotions,” says Markwell. “And with a clearer head, you can make decisions that will help in putting you on a more solid track to a successful retirement when the time comes.”

Connect with a Thrivent financial advisor to discuss how you can align your 401(k) assets with your short- and long-term financial strategies.