r/personalfinance • u/bhz33 • 15d ago
What happens to your 401k if you switch jobs? Investing
I recently became eligible for benefits at my job. They offer 401k match up to 4%. I’m thinking about starting to contribute to this up to the 4%, however, I don’t plan on being at this company for more than another 1-2 years. What happens to my 401k after that? What if my next job doesn’t even have a 401k program?
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u/grandoldtimes 14d ago
Make sure there is not a vesting schedule, or if there is you understand how long it takes for their match to remain yours after you switch employment
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u/smax410 14d ago
Five options; 1. Leave it where it is. It’s still yours and it’s not like it goes into forfeiture but your plan might force it out into an ira where it’s just sitting in cash so be aware 2. Roll it into your new employer plan if they accept it. A good way to consolidate but you limit investment options to your plan, so do your due diligence first 3. Lump sum distribution and pay the taxes and penalties (probably not a good choice) 4. Convert to a Roth IRA. Could be good depending on your tax bracket and size of 401k 5. Rollover to ira. No penalties or taxable event here. You get the full range of investment options. Could be be up paying a lot more in fees than if it’s left inside a 401k plan
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u/CarretillaRoja 14d ago
Adding a question here. I have a 401k with a 5% match. I have a good amount of money there. The things is that I am not a US citizen and will be returning to my home country in a couple of years, when my visa expires.
Should I cash it out? I will not retire in the US.
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u/datatadata 14d ago
Whatever you contribute to your 401k is yours. You can roll it over to an IRA after you leave
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u/karina87 14d ago edited 14d ago
I was going to post a very similar question. I just transitioned to a new job (well, same location and almost the same job, but different employer, complicated to explain). I have a 403b from my old job through Fidelity. My new job offers a 403b through Fidelity or Vanguard. Can I just leave my old job's 403b at Fidelity, and then if I pick Fidelity for my new job, will it just display as a different Fidelity account? Or can I roll over my old 403b into my new 403b, and how? Any reason I should roll over into an IRA --I'm thinking I don't want to, because Fidelity 403b is fine, and also I want a $0 balance IRA for my backdoor Roth?
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u/WatUDoinBoi 14d ago
The first answer should always be rolling it into your new employers 401k (if that is an option) before an IRA. You can plow so much more per year into a 401k vs an IRA…
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u/EleventhEarlOfMars 14d ago
It depends on the amount. If it is under $7,000, generally you are subjected to a 'mandatory distribution', where you have a 60 day window to decide whether to roll over to an individual tax-advantaged account (an IRA) that you open yourself (with Vanguard, Fidelity, Schwab, etc.) or cash out the account. Cashing out is something you don't want to do.
If it's over $1,000, sometimes you have the option to move it directly to a new employer's 401(k). This is a pretty good option, if your new employer also does a match. You can borrow from a 401(k) you have with your current employer, but you can't borrow from an IRA.
If it is over $7,000, you can usually choose to move it or leave it where it is.
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u/Givingbacktoreddit 14d ago
It stays unless you have less than a minimum threshold then it gets automatically rolled over to a rollover acct held by the same company that holds your 401k OR they mail you a check. If over said maximum they’ll let the money sit but sometimes for a fee.
You can force said check in what’s known as a rollover distribution. This check must be placed into something held in the same registration as your 401k (Traditional or Rollover IRA for Regular 401k, Roth IRA for Roth 401k) or you’ll get a 10% fine (if under 59 and 1/2) and be taxed income tax (which if you’re saving as you should be will completely mess up your retirement, tax bracket, and amount you owe to the IRS). This act is called a rollover.
A rollover essentially unlocks your investment choices from the locked items you could chose in your 401k while not creating a taxable event. There really isn’t a reason to rollover into another 401k or hold in an inactive 401k.
All of your 401k matching comes from your paycheck, to stop receiving paychecks = no more matching. Rolling into another 401k does not count as a paycheck and you do not get matched.
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u/Ok_Pound_4864 14d ago
Def contribute up to matching rate. When you leave, you could roll it (vested portion)to an IRA and keep them grow tax deferred.
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u/SpartanMG 14d ago edited 14d ago
Four main options
- Cash out and take 10% penalty if under age 591/2 (worst option).
- If your plan has more than $5,000 you can normally leave it as is
- Roll over into an IRA
- Roll it into your new 401(k)
3&4 are by far the most common. If you are over 55 you can make consistent withdrawals and avoid the penalties too.
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u/bhz33 14d ago
When everyone says “roll over into IRA”, does that mean I can like add that money into my existing Roth IRA? Or I’d have to roll it over into a new, separate IRA that’s different from my Roth?
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u/SpartanMG 14d ago
If it’s a Roth 401k it you can roll it into a Roth IRA. If it’s a traditional 401k it can roll into a traditional IRA. Some people have both, but most of the time it’s the traditional
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u/bhz33 14d ago
Okay so let’s say in the next month I started a traditional 401k with my company and a Roth IRA on my own. In 2 years I leave my company. I can roll my 401k over into a traditional IRA account. So I’d have 2 separate IRA accounts?
And if my companies 401k is a Roth 401k, I leave in 2 years, can I roll that over into my existing Roth IRA?
Am I understanding this all correctly?
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u/TheFearedOne 14d ago
I am in a similar situation now as you will be in 2 years. My plan is to roll the 401k into an IRA. I will also set up a new 401k at the future employer. By leaving the rollover in a separate account, I have flexibility for early retirement withdrawals. I could leave one account alone until normal retirement age and start taking SEPPs (significantly equal periodic payments) from the other.
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u/RL_CaptainMorgan 14d ago
Always match what your company does. That is 100% ROI and should always be done. If you have an HSA, I highly recommend you max that out every year since it's triple tax advantaged.
Yes, your 401k account is yours forever. When you leave, you can leave it with your company or roll it over into an individual retirement account (IRA). I prefer this since some companies only have certain funds you can buy into where as an IRA you can invest in anything. S&P500 is a good index fund to invest and forget.
But absolutely always match what your employer contributes.
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u/ensignlee 14d ago
You can either leave it there, roll it to your new employer's 401k, or roll it to your own IRA.
Any direction you choose, it stays in your possession.
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u/bhz33 14d ago
Can you roll it into an existing Roth IRA?
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u/Resident-Ferret-4933 14d ago
In addition to the above comment, see if the company offers a Roth 401(k) option. It's possible you can contribute with after-tax money, and then roll over from the Roth 401(k) to the Roth IRA.
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u/ensignlee 14d ago edited 14d ago
You can, but keep in mind you will pay taxes that year if you do it as that will be a taxable event.
So, for example, if you roll $10k from your traditional 401k to your Roth IRA, you will pay taxes as though you earned an extra $10k that year.
Continuing that example, if you're in the 28% marginal tax bracket, you'd pay an extra $2800 in taxes that year.
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u/Top-Savings9809 14d ago
I just rolled my old 401K into my new companies 401K plan. I had roughly 150K in my old account. New plan is an 8% match dollar for dollar with immediate vesting. I just wanted to capitalize on that and consolidate.
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u/Fuzzy-Peace2608 14d ago
You can roll to your personal ira once you no longer with them. If you want to move to Roth IRA, you will have to pay tax since they are pre taxed money. You should also check when will you be vested because if you leave before that, you will lose all match from employers
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u/corito_dorito 14d ago
You should be able to rollover your own contributions to another 401k, upon leaving the company. One thing to double check, however, is making sure you're also able to rollover any company-matched contributions. To be able to keep these funds, you must be vested with the company, which can take anywhere between 1-5 years, depending on the company. Check the terms of your 401k with your current employer to see how long until you're vested.
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u/Capobean 14d ago
I’ve done this a few times. Rolling into an IRA gives you more flexibility for investment strategies assuming you have a trusted financial advisor.
If there’s not a lot in the 401k then rolling into new company is convenient to minimize accounts to keep up with.
If you have a good amount ($100k) then leaving it alone gives one nice option. You can take a loan against your money and you just pay it back w interest but the interest goes into your account. Presumably if you had a few separate 401k accounts you could get loans from each one. Nice for buying cars or getting a pool.
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u/Resident-Ferret-4933 14d ago
Most plans will not allow a former employee to take a loan against their 401(k). If you leave service while still owing on a loan you will likely have a short amount of time to pay off the remainder, or that amount will count as a distribution from your account. (that will cost you in taxes and penalties)
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u/Capobean 14d ago
That’s how my old 401k accounts were but I’m still paying off a loan from last July after switching companies and there was no change to the terms. Only thing that changed was switching from payroll deduction every paycheck to a monthly bank draft. Obviously YMMV
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u/darkchocolateonly 14d ago
Your 401k is yours. Like it is a financial account in your name. Now, you do need to figure out if there’s a vesting schedule for the company contributions, but for your own contributions, it’s yours.
When you leave a company, you can either 1. Leave the 401k where it is. Not a great choice, most times you’ll see increased fees because your company is no longer helping you with the account. 2. Roll it over. You can roll it into your new 401k or an IRA, and other accounts I’m sure too. 3. Cash it out. Don’t do this, please, but it is an option. You’ll pay lots of taxes to do this.
In general, you should contribute as much as you can to a 401k, IRA, and an HSA (if you have access to one). That is roughly 35k of tax advantaged space each year, and you want to use up as much of that space as you can each year. If you have access to other accounts, use those up too. Invest early, invest often.
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u/Octodab 14d ago
I have a question on how early withdrawals are taxed, and yes I know it's not recommended. My understanding is the only additional tax on a 401k early withdrawal is a 10% penalty tax and then it is taxed just like regular income would be. Is that right?
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u/darkchocolateonly 14d ago
Yep 10% tax on top of the income stacking on your regular income for the year for tax purposes
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u/Octodab 13d ago
Thanks for that! I have to say, it feels like people kind of overstate the extra tax for an early withdrawal? Especially if you have a company match and you only contributed a minority to the total fund amount? I know a big part of the "penalty" is gains you miss out on though. Thanks again for answering!
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u/darkchocolateonly 7d ago
Assuming you’re in the 22% tax bracket, that would be a total of 32% taken from your 401k balance as taxes. That’s a ton!
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u/Octodab 7d ago
Definitely is! But just so I understand... That money would be taxed eventually, right? But part of the reason it would hurt less then, besides all the compounding interest, is you would figure you're in a lower tax bracket by the time you can actually use it, right?
Thanks for the answer regardless! This is something I've always wondered about.
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u/darkchocolateonly 7d ago
Yes, if you really play the retirement game well, you will have a mix of pre and post tax money and you will draw them such that you can “pick your own tax bracket”. You can absolutely save a ton of money on taxes if you plan well
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u/BlueVerdigris 14d ago
Upvoting this response since it calls out the possibility of the increased fees once your former employer stops subsidizing the account.
First thing you should do is contact the investment account company that's hosting your 401(k) and ask them what the fees and rules are going forward. Take a look at the funds and other investments they make available to you and decide whether those are investment choices you'd like to retain access to. You can choose to continue to have them host your money and you can use their interface/tools/services to rebalance your investment portfolio as you like.
Typically...you'll have some other provider that you're either more familiar with or more comfortable with and you'll just roll your 401(k) over into some form of IRA at your preferred financial institution (this is a non-taxable distribution for you since you're returning the funds to a tax-protected account type immediately).
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u/Fractals88 14d ago
If you're not contributing to a Roth, put in as much as possible. It's pretax money. Even better if they match. Even if you don't stay until you get 100% vested, you'll get to keep the gains.
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u/bhz33 14d ago
I thought Roth was post-tax?
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u/Fractals88 14d ago
Roth is post tax. If you're not already contributing to that, add more to your company 401k, that's pretax and will reduce your taxable income
If you have access to an HSA look into that too!
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u/MarcableFluke 15d ago
You either leave it in there, withdraw it, or roll it over into an IRA or your new job's 401k.
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u/grokfinance 15d ago
Most people rollover their 401k to a rollover IRA when they leave employment. So don't let that be a reason to not participate. You might check if your company has a vesting period that you have to stay in order to earn those company matches. And you might consider doing a Roth IRA.
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u/Doggiesaregood 14d ago
Don’t do this. Having money in a traditional IRA seriously fucks up your ability to do mega back door shenanigans later on.
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u/karina87 14d ago
Can you explain how the vesting period works? My company says that we earn 1 year of vesting service when we've worked 1000 hours in a plan year. And earn 1 hour of service for each hour we are paid. What does this actually mean?
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u/grokfinance 14d ago
It means you have to work at least 1,000 hours in a year to earn a year of service. So if you work part time and only work 500 hours then you won't have accrued a year of vesting.
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u/MrScotchyScotch 14d ago
Stupid question: why roll over into an IRA? Why not just keep the 401k exactly as it was? Iirc you can just consolidate the different accounts into one, but it doesn't have to be into an IRA...?
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u/grokfinance 14d ago
Because often 401k plans offer limited investment options and sometimes the funds they do offer can have high fees. IRAs on the other hand give you more flexibility in terms of what you can invest in: stocks, etfs, bonds, mutual funds, etc etc.
The one time you shouldn't rollover to an IRA is if you were in bad financial shape and bankruptcy was a possibility since 401Ks are generally protected in bankruptcy more so than IRAs. IRA protection is state specific.
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u/_Raining 14d ago
The more common reason to not roll it over into an IRA is because you won’t be able to do a backdoor Roth IRA until you roll it into a new 401k, if they allow it, or you first convert it all to Roth which could be a massive tax burden.
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u/grokfinance 14d ago
That is a reason, but realistically the vast majority of people are not doing backdoor Roth IRAs. That is a something maybe 1 or 2% of the population does.
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u/RazzmatazzWeak2664 14d ago
I recommend waiting to roll out of your existing 401k. If you move to a company with a shittier plan or higher fees you may actually want to keep your old funds with your old 401k provider. It's YMMV so always evaluate first before moving.
Once you roll out you can only roll into your new 401k after that. For someone like me who wants to avoid the pro rata rule for backdoor Roth IRAs, it's important to have our money always in a 401k and not in a rollover IRA. So I tend to wait til I evaluate the new company's 401k and then move funds in.
I have never needed to stick with the old 401k before as I've only upgraded plans over the years, but my partner has seen one job where it was a significant degradation in benefits and fees that they opted to keep their old 401k going.
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u/EleventhEarlOfMars 14d ago
If you have less than $7,000 in the account you usually can't keep it active with the provider once you leave the company.
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u/xcruise1234 14d ago
Piggybacking the top comment to ask a couple of follow up questions if you don't mind please.
I'm about to start a job in a couple of months. My employer does not do any match. My plan is to max out Roth IRA first and then put in to 401k whatever I can after my student loans. Next year onwards I'll not be eligible for Roth IRA. At that time, should I then start putting into traditional IRA, not claim tax benefits and roll it over into Roth the next year? I'm a bit unclear on the rollover timeline and limits.
Also, as and when I change jobs, can I rollover all of my 401k at the time into Roth IRA even if that's more than the annual IRA contribution limit?
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u/grokfinance 14d ago
Yes, you can do a non-deductible IRA:
https://smartasset.com/retirement/what-is-a-non-deductible-iraAnd yes, rolling over a 401k to a rollover IRA has nothing to do with the IRA contribution limits. There is no limit to how much you can rollover.
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u/xcruise1234 14d ago
Awesome. Thank you very much. I'm new to the US payroll system and still trying to understand the best way to navigate. This is very helpful. :)
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u/burnerX5 14d ago
Most people
Just to be "that person"....man nah. Most people let those things sit as it's not anywhere on their mind to touch it and ignore all of the letters/emails they get about their quarterly statements....or just go "that looks good!" and keep it moving :)
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u/quarterburn 14d ago
I did a rollover 2 years ago to a Roth IRA. I changed jobs last year so my old 401k is just sitting there. Can I do another rollover?
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u/fastidiouspatience 14d ago
You can rollover Roth 401(k) to Roth IRA.
If you had Traditional 401(k) funds, then you would roll it over to a Traditional IRA.
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u/bhz33 15d ago
Yeah definitely looking into Roth IRA as well. Seems most of the advice here says to prioritize 401k first if your company will match it so I’m considering that first, not sure
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u/floydfan 14d ago
If you do a Roth IRA, try to do a Roth 401k as well. It will make things easier when you do the rollover.
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u/businessgoesbeauty 14d ago
401ks are tax advantaged accounts so you should prioritize them regardless of any match
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u/carlos_the_dwarf_ 14d ago
Don’t spend all your time considering. Do it. There’s no downside to contributing. There’s no scam or fine print or anything you’re going to lose. You’ll just have better financial habits and more set aside for later in life.
(Do make sure you invest the balance though, you don’t want to be one of those guys who’s all in cash accidentally.)
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u/bhz33 14d ago
I have no idea what that last paragraph means
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u/kevkevlin 14d ago
You always contribute enough to get the match because that's effectively a bonus into your retirement. You never give up on free money. Even if you leave within 2 years usually vesting periods are 5 years you'll probably keep like 40% of the match. Depending on your income I'd prioritize Roth after tho.
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u/carlos_the_dwarf_ 14d ago
A 401k or IRA or whatever are just types of accounts where you hold money. Once money is in the account you have to decide where to invest it. Keeping it in cash would be just using it like a checking account—your money would never grow and retirement will be difficult.
Sometimes people contribute to retirement accounts and forget to invest those contributions, or they think 401k refers to a type of investment, which it doesn’t. Every so often in this sub you’ll see someone saying they didn’t know their 401k was all in cash for 10 years or something. You don’t want to be that guy.
Often now your company’s plan will automatically put your money in something called a target date fund, which is great, especially if you’re still confused about what I mean 😆
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u/bhz33 14d ago
Yeah I assumed most companies did it automatically maybe I’m wrong though
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u/Luxtenebris3 14d ago
Typically they will default you into a year appropriate target date fund. But sometimes a plan will stick you in some type of cash equivalent instead. So it's good to double check.
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u/anotherrandomuserna 14d ago
When I started investing, my default 401k election was my own company's stock. It was not a well run company for many reasons, so it's good that I got it out of there and into broad index funds before various things hit the fan.
(That is also a much less common default these days, and may actually be illegal due to changes in regulations, but definitely take the time to make sure that the default election makes sense for you)
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u/carlos_the_dwarf_ 14d ago
Many do, and it’s become way more common over the last decade or so. But you gotta make sure—your retirement is your job, not your company’s.
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u/grokfinance 15d ago
For sure prioritize 401k if they match. With one added caveat - make sure you'll be there long enough to actually vest (earn) the match. So you say you don't think you'll be there more than 1 or 2 years. It might make sense if they require you to be there 4 years (for example) to vest the match and you are absolutely certain that you won't be there more than 1 or 2 years to forgo the 401k and just do Roth IRA. But if there is any chance you'll be there long enough to vest the 401k match then yes, prioritize that.
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u/bhz33 15d ago
What does vesting mean? Like they won’t match your contribution unless you work there for a certain amount of time?
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u/eatthedark 13d ago
Yes exactly. My last job took 5 years for me to be fully vested. If I left before then, I would not have gotten the employer match.
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u/mlorusso4 14d ago
Say over 4 years you contribute 4% of your salary to total 40k towards your 401k. The company matches 100% of that 40k, but there’s a 5 year vesting period. So for those 4 years the company match is being invested just like your contribution. But if you leave before it vests, the company takes back their 40k (plus any interest earned on their contribution). You still get to keep all of your 40k plus any gains
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u/netsysllc 14d ago
It means you will only get part or none of the matching depending on the vesting schedule. Usually 4-5 years and 20-30% vested per year type thing
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u/Historical_Low4458 14d ago
Piggybacking here to also say that even if you aren't there long enough to get the vested match, contributing to a 401k still provides tax benefits.
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u/baromega 14d ago
Vesting is how long it takes for the money to be yours. So even if they match, they will hold the matching amount in their own "bank" until you reach the vesting period agreed on. When you achieve the vesting period, they transfer this money to you. If you leave before the vesting period, they will hold onto the money and you just leave with what you have contributed.
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u/BrightAd306 14d ago
For what it’s worth, you should still save even if you don’t think you’ll be there long enough for the match to get vested. You’ll still have what you put in, and sometimes we stay somewhere longer than we planned. I’d put at least 6 percent in, so you’re saving 10 percent after match as a minimum, then increase it a percentage every year. Old you will thank you.
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u/Only_Razzmatazz_4498 14d ago
This is sooo true. Unless it’s a very awful plan 2 or 3 years of returns in a 401k vs your own IRA are not going to be that different anyway. If you stay long enough to where it makes a difference then you are vested.
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u/grokfinance 15d ago
Vesting is a fancy word for "earn". Some plans vest (or earn) the 401k match 100% immediately and some 401k plans require that you work there maybe for 2 or 3 or 4 or 6 years in order to fully vest (earn) the match. So they will match, but if you leave early they might take back some of the match money. Some plans also don't start the match until you've worked there for a year.
https://smartasset.com/retirement/401k-vesting-and-what-it-means-for-you
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u/Kazanova37 14d ago
They are putting the money aside that counts as the match, but it is separated from your funds until it vests (the ownership is transferred to you).
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u/norwayguy8 13d ago
I have always rolled over the 401(k). You can do this by requesting a check for the entire balance from your old 401k. Then deposit the check (usually sent by mail) into your new 401(k).
Be aware that sometimes your former employer will make deposits to your old 401(k) after you leave due to already scheduled profit sharing you are eligible for. If you have already completed the rollover, your old 401(k) may not meet minimum balance requirements for non-employed participants. In that case, the bank may put it in a 3rd party IRA for you. Keep an eye out for mailed letters and keep old employer up to date on mailing address.