What to Do with Your 401(k) When You're Leaving Your Job

As you focus on your next career move, be sure to take some time to review the next steps for your employer-sponsored retirement plan.

In this article you’ll learn the pros and cons of these 401(k) considerations:

• Can I leave my 401(k) with my former employer?
• Can I bring my 401(k) funds to the plan at my new job?
• Why should I consider rolling over my 401(k) assets into a traditional IRA?
• Why should I consider rolling over my 401(k) assets into a Roth IRA?
• Can I cash in all or part of my 401(k) if I need additional emergency funds?

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 Associate 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 all of a sudden, 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.

Can I leave my 401(k) with my former employer?

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

Pros of leaving your 401(k) with your former employer:

• You’re still investing, tax deferred. 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.  
• You gain some time to decide what’s next. Get the mental space you may need to focus on more immediate concerns.
• You may still be able enjoy the unique benefits of your former employer’s 401(k) plan. 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.

Cons of leaving your 401(k) with your former employer:

• You have no choice in what funds your former employers choose. Since your former company administrates the retirement plan, you’ll only be able to select funds from on 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 flexibility that you could have with a traditional or Roth IRA,” adds Markwell.
• You’ll be a restricted plan member. 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 ex-employer’s discretion,” says Markwell.

Can I bring my 401(k) funds to the plan at my new job?  

Yes. You can transfer your current assets from your old 401(k) plan, or from 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.

Pros of bringing your 401(k) funds to your new job:

• You’re consolidating your investments. 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.
• You may gain flexibility. 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 72 years of age, you may be excused from required minimum distributions (RMDs), if your new employer’s plan allows it.
• Your new plan may be less expensive. Account fees and investment threshold vary from plan to plan, so be sure to inquire about these before deciding to bring your 401(k) funds to your new job.

Cons of bringing your 401(k) funds to your new job:

• You may pay more. Check on the new plan’s fees and expenses. They may be higher than your former employer’s.
• You may lose investment options. 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.
• Your previous employer’s securities may not transfer. If you were buying your former company’s own stock, you may not be able to transfer it to your new 401(k) plan. Consult your ex-employer’s benefits department and your accountant to discuss plan particulars.

Why should I consider rolling over my 401(k) assets into a traditional IRA?

This transfer is typically penalty-free and may give you greater investment flexibility.

Pros of rolling over your 401(k) assets into a traditional IRA, tax- and penalty-free:

• You can invest with a wider choice of funds tailored to your goals, interests, and risk appetite. Unlike a the typical 401(k), an IRA comes with the ability individually select asset types – and possibly additional investment guidance. 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 have the potential to grow, tax deferred. Enjoy the tax benefits of pre-tax investments.

Cons of rolling over your 401(k) assets into a traditional IRA:

• You can’t contribute as much as you can to a 401(k). In 2021, for example, the IRS is capping annual IRA contributions at $6,000 ($7,000 if you’re 50 or older), as compared to $19,500 ($26,000 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.
• You’ll need to wait longer for penalty-free distributions. An IRA requires that you be 59½ or older to avoid the 10% early withdrawal penalty, whereas a 401(k) removes it if you leave your employer in the same year you reach age 55.

Why should I consider rolling over my 401(k) assets into a Roth IRA?

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

Pros of rolling over your 401(k) assets into a Roth IRA:

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

• You decide when to withdraw money. Roth IRAs have no required minimum distributions (RMDs).
• You may worry less about taxes. All future earnings grow tax deferred and may be tax free if you’re 59½ and you’ve had your Roth account for five years.

Cons of rolling over your 401(k) assets into Roth IRA:

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

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

How a Roth IRA conversion* can leverage currently low tax rates.

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 rollover 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 required minimum distributions (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 were in the 22% tax bracket, but now you’ve dropped to 12%. If you convert $100,000 of 401(k) assets to a Roth IRA, you’ll save 10%, or $10,000, right off the bat,” explains Markwell. “And if taxes rise between now and your retirement target date, at which time you’d otherwise taking distributions, you will have further benefitted 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 professional can help tailor your investments to your individual strategy, and also help you revisit and refine that plan as needed.  

Can I cash in all or part of my 401(k) if I need additional emergency funds?

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.

Pros of a total or partial 401(k) cash-out:

• 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.

Cons of a total 401(k) cash-out:

• You’re losing investment potential. A large loss of accrued gains can impact your retirement plans.
• You’re incurring tax and penalties. The IRS charges a mandatory 20% withholding tax, since this is considered income that’s thus far been tax deferred, and an early-withdrawal penalty if you’re younger than 55. State and local taxes, depending upon where you live, may also apply.

How to get emergency cash from your 401(k) and keep on investing

• 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 professional 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 professional to discuss how you can align your 401(k) assets with your short- and long-term financial strategies.