What should you do with your 401(k) when you switch jobs?

You’ve worked hard to save money in your 401(k) or 403(b), but what should you do with this money if you change jobs? You have several options and it’s important to consider each carefully.

Your Ameriprise advisor will evaluate your options and help you decide based on your financial goals. If you don’t have an advisor, you can search for one in your area.

“Should I roll over my 401(k) or leave it in my previous employer’s plan?”

Keep your savings with your former employer’s plan 

If you are happy with your current investment options and your former employer’s qualified retirement plan allows you to maintain your account, this might be the most convenient choice, but you should still evaluate your options.

If you choose to leave your savings in the plan, be sure to track your account regularly, review your investments as part of your overall portfolio and keep the beneficiaries up to date. Maintaining a complete financial picture of all your retirement savings can help both you and your financial advisor monitor your progress and stay appropriately invested for your goals, risk tolerance and time horizon.

Additional considerations:

  • The amount of money you have in your account. If you have less than $5,000 in your account, you may be required to transfer your money out of that retirement plan, and if you have less than $1,000 in the account, your former employer will likely cut you a check for the appropriate amount.
  • Employer stock. If you have employer stock that has grown significantly in value, tax breaks for employer stock distributed in kind from a qualified plan will be lost if you roll to an IRA or transfer to a new employer’s plan.

Transfer your savings to your new employer’s 401(k) plan 

Your new employer’s qualified retirement plan might offer investment options that better support your financial goals. It could also be easier to track your investment performance in one account versus several. It’s worthwhile to talk with an Ameriprise advisor who will compare the investments and features of both plans.

Should I transfer over my 401(k) to my new employer?

Using a direct transfer method, or 401(k) to 401(k) transfer, you can transfer your entire account balance without taxes or penalties. You can work with your new employer’s 401(k) plan administrator to select how to allocate your savings into the new investment options.

Additional considerations:

  • Transfer rules. Failure to follow the 401(k) transfer rules may result in extra penalties and taxes. For example, if you receive your funds from your previous employer’s retirement savings plan in the form of a check, mandatory 20% withholding will apply and failure to deposit the funds into a new retirement savings account within 60 days may result in tax and penalties.
  • 401(k) loans. You can’t borrow against IRAs, but you may be able to borrow money from your 401(k). However, there could be long-term implications to your retirement savings goals, so you should carefully weigh your options and discuss the pros and cons with your advisor.

“Should I roll my retirement savings to a traditional or Roth IRA?”

Roll your funds into an IRA

With this option, you become the owner of your retirement savings, rather than a participant in an employer qualified plan. The primary benefit of an IRA over a typical 401(k) is access to a wider range of investment options. You may also be able to consider annuities or other investments with guaranteed retirement income options.

You have several direct rollover options:

Roll your 401(k) or 403(b) to a new or existing traditional IRA

  • No taxes are due when you move the asset, and any new earnings accumulate tax deferred.

Roll your traditional 401(k) account to a new or existing Roth IRA. 

  • This is also known as a 401(k) to Roth IRA conversion
  • You will pay taxes on the pretax contributions and earnings you convert.
  • Earnings that accumulate after the rollover will be eligible for tax-free withdrawal when your Roth IRA has been open at least five years and you are at least 59½ years of age.

Roll your Roth 401(k) account to a new or existing Roth IRA. 

  • No taxes are due when the money is moved, and any new earnings accumulate tax free if conditions are met.
  • Earnings are eligible for tax-free withdrawal once the Roth IRA has been open at least five years and you reach age 59½.

Additional considerations:

  • Contribution limits don’t apply to rollover. Although IRAs typically have an annual contribution limit of $6,000, there is no limit on funds that come from a 401(k) rollover. Even if you have a large sum in your 401(k), you can deposit all of it into a traditional IRA through the rollover process.
  • Required minimum distributions may take effect. If you’re still working at age 72, you’ll be required to start taking minimum distributions from your IRA. The penalty for not taking your required minimum distribution payments is very steep. By comparison, you generally don’t have to start taking money out of your 401(k) until you retire.

Pros and cons: 401(k) vs. IRA

 

Pros

Cons

401(k)

  • Under federal law, 401(k) plans offer protection from creditors, and funds cannot be seized if you are in bankruptcy proceedings 
  • You may be able to borrow money from your account, depending on your plan
  • Required minimum distributions don’t begin until you retire
  • Likely fewer investment options to choose from
  • Less control over your savings (your employer selects the investments you choose from)
  • Not all plans offer a Roth option

IRA

  • Typically, a wider variety of investment options including managed accounts, annuities and alternative investments
  • More control over your savings
  • Can choose between Roth and traditional IRAs for added flexibility
  • Assets rolled from a 401(k) are protected in the event of bankruptcy but protection from creditors in other circumstances varies by state
  • Cannot borrow money
  • Required minimum distributions begin at age 72
  • You must be 59 ½ to avoid the premature distribution penalty (unless an exception applies)


 

“Is cashing out my 401(k) when I change jobs a good idea?”

Cash out your 401(k)

Cash outs provide exactly what you would expect — cash. But there are many implications to consider:

  • The cash out is considered income, and you may incur local, state and federal taxes on the money that you withdraw.
  • Removing funds from your retirement account and paying taxes may mean you will need to work longer to make up the difference. You will also lose the benefit of time. 
  • You will be required to pay a 10% early withdrawal penalty on top of the taxes if you left your employer prior to the year you turned 55 and are younger than 59 ½, meaning you won’t end up with as much money as you may have planned for.

Looking for more information?

Our rollover evaluator tool guides you through a series of questions about your individual situation and helps you evaluate your options.

Rollover evaluator

If you have multiple retirement savings accounts held in more than one place, the rollover evaluator will help you understand the pros and cons of keeping your retirement savings in an employer-sponsored plan such as a 401(k) or 403(b) versus rolling it over into an IRA.

GET STARTED
Ameriprise advisors know that trust is a matter of work, not words.

Or, request an appointment online to speak with an advisor.

There's a sense of confidence that comes from feeling in control of your finances - and working with a financial advisor can help you get there. Please share your experience and tell your friends and family about me.

Background and qualification information is available at FINRA's BrokerCheck website.

Do not use this information as the sole basis for investment decisions; it is not intended as advice designed to meet the particular needs of an individual investor.

Be sure you understand the potential benefits and risks of an IRA rollover before implementing. As with any decision that has tax implications, you should consult with your tax adviser prior to implementing an IRA rollover.

Diversification does not assure a profit or protect against loss.

Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.

Ameriprise Financial Services, LLC. Member FINRA and SIPC.