If you’ve decided to change jobs, congratulations! This is an exciting step forward in your career. But do you know what to do with a 401(k) after leaving a job?  While not a certainty, the possibility of changing jobs at least once during a career has significantly grown over time. According to the Bureau of Labor Statistics, in 2024, the median number of years that wage and salary workers stayed at one job was 3.9 years, down from 4.1 years in 2022. Whatever the reason, people are spending less time than ever at one employer, which means there are more decisions to be made about what to do your retirement savings when you leave your job.

What Are Your Options When You Leave a Job?

The good news is you have multiple options for what to do with a 401(k) when leaving a job. These options include:

• Keeping the account right where it is with your former employer sponsored retirement plan
• Rolling it over to an Individual Retirement Account (IRA)
• Moving the account over to your new employer’s retirement plan (if applicable).

Each option has its own benefits, and careful consideration is needed to decide what the right course of action is for your unique financial situation.

We sometimes get asked if it’s a good idea to liquidate a retirement account and take a full distribution when you leave your employer. While this may be an option,  it rarely results in an ideal outcome due to the taxes, potential penalties, and other long-term impacts the distribution would have on your financial plan.

Deciding On The Best Option For Your Situation

Now that you know the options for your retirement accounts, how do you determine which option is best for you? Here are some key items to consider when making this decision including investment options, fees, and distribution needs.

• Investment Options: Most 401(k) plans have a limited array of investment options, which could tie your hands if you’re seeking to further diversify the types of investments in your portfolio. Rolling your funds into an IRA often provides a wider range of investment options. However, the investments offered within 401(k) plans are usually excellent, despite the limited number available, so it is important to compare the available investments in your former employer’s plan lineup to a new employer’s, and to other investments available outside of the 401(k) universe, before making the change.
• Fees: Along with having access to a wider range of investment selections, you may also be able to find investments that have lower expenses than those inside of a 401(k) lineup. Plan providers may also charge additional recordkeeping fees if you keep your assets in the plan of a former employer, since you no longer qualify for that employee benefit. There are also cost considerations when choosing to invest in an outside IRA, so it is important to understand all potential fees associated with any account changes to help make the right decision.
• Distribution Needs: If you decide to roll over your 401(k) into an IRA, it could still make sense to leave a portion in your current 401(k) plan, especially if this account makes up the majority of your savings and investments, and you are planning to retire early. This is because 401(k)s have more favorable distribution rules than IRAs for people between the ages of 55 and 59 ½, meaning you can access that balance without penalty. If you move the entire 401(k) balance into an IRA, you must wait until age 59 ½ before withdrawing funds to avoid a tax penalty.

You Don’t Have to Make These Decision Alone

It’s important to know your options and consider what is best for your situation when deciding what to do with a 401(k) after leaving a job. If you are contemplating a job change or even retirement, determining what to do with the retirement savings is a decision that will have long lasting impacts on your overall financial plan. You don’t have to make these decisions on your own.

Whether it’s comparing and selecting the right investments, analyzing fees and other expenses, or determining the right time to start taking distributions, our team of professionals at Pathfinder Wealth Consulting is here to guide you forward. We will be by your side through this transition, and any other financial crossroads you may face. Contact us today to speak to our team and get started.

 

If your employer-sponsored plan account holds significantly appreciated employer stock, you should carefully consider the negative tax implications of transferring the stock to an IRA against the risk of being overly concentrated in employer stock. You should also understand that your financial advisor may earn commissions or advisory fees as a result of a rollover that may not otherwise be earned if you leave your plan assets in your old or a new employer-sponsored plan and that there may be account transfer, opening, and/or closing fees associated with a rollover. This list of considerations is not exhaustive. Your decision whether or not to roll over your assets from an employer-sponsored plan into an IRA should be discussed with your financial advisor and your tax professional.

Advisory services offered through Commonwealth Financial Network®, a Registered Investment Advisor.