Your 401k Options When You Leave a Job
So, you left your job for another opportunity. Congratulations! You have given your two weeks and are ready to move on. You may have said goodbye to coworkers, had one last happy hour, and packed up your desk. Did you remember to check your 401k options before you left?
Finding out what to do with your 401k after you leave a job can be stressful. You may not know that you have options when it comes to your 401k. Today, we’re going to be breaking down what the most common options are when leaving your company and ultimately, the 401k package that comes with it.
Option #1 - Leave it There
The easiest option is to leave your 401k right where it is. When you leave your job, your 401k stays invested in the mutual fund or ETF that it is currently in. Your 401k does not automatically stop being invested just because you leave a job. What does stop happening is your ability to contribute to it. Your 401k provider is also different from your company. Your old firm will not be able to “see” your investments. There are companies known as “plan providers” that are in charge of your 401k. Common 401k providers for companies are Vanguard, T.Rowe Price, Morningstar, Paychex, J.P. Morgan/Chase etc. When trying to determine where your 401k is, look for names such as these.
The positive aspect of leaving it there is simplicity only. The cons are the lack of ability to keep it growing and contribute and minimal investment choices. Although leaving your 401k where it is maybe the most comfortable option, it is usually the worst choice for your retirement future.
Option #2 - Move it to an IRA
An IRA stands for an individual retirement account. Once you leave your job, you can convert your 401k into a Roth IRA or transfer it into a Traditional IRA because your employer is no longer sponsoring it. This option makes sense if you are moving to a company that either does not provide a 401k or does not have great investment options. You may enjoy moving your 401k to an IRA so that you can consolidate your retirement savings and have more freedom over your investment choices. The process of moving your 401k to an IRA can be tricky. There is still a lot of paperwork involved depending on what plan provider your company has and where you are moving your money to. Many firms also try to stop you from moving your money over with scare tactics so that you keep your money with their company. This is a process I suggest discussing with a financial consultant.
Option #3 - Transfer it to Another 401k
Does your new company have a 401k plan? Great! This is the only way you can transfer a 401k to another 401k. Remember earlier when we said one of the cons of leaving your money at your old 401k is that you can’t contribute any longer? This solves that problem. What does this mean? This means you take all of your funds from your previous company’s 401k and transfer it to your new 401k so that you can still contribute. One of the cons of doing this is that you may not have as great of a match or as good of investment options however, you still are able to contribute to it and keep building your nest egg. This process also takes paperwork and can be easy or difficult depending on your new plan provider.
Moving your money from one financial institution to another is still an antiquated process. Why? Your financial institution wants you to keep your money there so they make money! Don’t be fooled by this process. Know your options so that you can make the right move for your financial future instead of the financial institutions.