In 2021, more than 38 million Americans quit their jobs — and so far in 2022, the Great Resignation shows no signs of stopping.
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Leaving an old job and starting anew can be really exciting (especially if it comes with a healthy pay bump). But it can also be a stressful time as you're learning a lot, getting into new routines, and trying to make a good impression. So sometimes things like figuring out what to do with your old 401(k) can slip through the cracks.
To get some expert insights and tips for anyone who's not sure what to do with an old 401(k), I reached out to Priya Malani, the founder and CEO of the financial planning firm Stash Wealth. Here's what we talked about:
Note: Keep in mind that personal finance is extremely personal, so some of these tips may not apply in your situation. For personalized recommendations, consult a financial planner.
1.First things first, what happens to the money in your 401(k) when you quit a job?
2.If your employer offers a match, is that money automatically yours too?
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Funds you get from your employer match might not be all yours when you leave, depending on the vesting schedule. Employers use vesting to encourage workers to stick around, so the money they contribute might not be yours to keep until you've been with them for a certain number of years. Companies handle vesting in a variety of ways, so it's best to check with your company's plan administrator to get all the deets about what happens to your employer's contributions.
3.Sooo, asking for a friend, what if you haven't touched a 401(k) from a job you had a few years ago? Can you still make moves?
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Yes, you can! Priya says that your old 401(k)s are not going anywhere. "Your money will continue to sit in your old 401(k) until you’re long gone if you let it. It is your money. But if the balance is under $1,000, your old company will probably just cut you a check and call it a day." BTW, if that happens, you will get taxed on this money.
"At the rate that we’re all switching jobs, odds are good you have more than one old 401(k) floating around out there," she continues. "Keeping all of that money in one place makes things way easier to manage when it comes to figuring out exactly how much money you have for retirement. Think about it like trying to get dressed for the day in a dirty house. Sure, you can dig for that one sneaker in the closet, and a shirt that’s in the bathroom, and a pair of pants from the dryer, and the socks on the couch, but wouldn’t it be easier if everything stayed in the dresser?" Wow, she did not need to drag my morning routine like that, but yes, she's absolutely correct. Keeping your money organized and together makes things way simpler.
4.What if you just leave your old 401(k) where it is?
5.Should you roll an old 401(k) into a plan with your new employer?
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If you decide not to leave your 401(k) where it is, you might move your money into your new employer retirement account. But depending on plan fees and other factors, this also may not be your best choice. Priya explains, "The issue here is that 401(k)s are often subject to higher fees and fewer investment choices than other retirement accounts like IRAs. While it may seem like a simple option, it’s probably not the best option on the table."
6.Is rolling a 401(k) into an IRA (Individual Retirement Arrangement) a better option?
7.OK, so how in the heck do you roll your 401(k) into an IRA?
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Not sure where you want to invest your retirement funds? If you feel confident about choosing stocks and funds and building your own portfolio, you might prefer to go with a brokerage.
However, Priya says she often advises clients to work with a robo-advisor instead because they make it really easy to pick a portfolio that fits your risk tolerance and age. "If your past job situation is fairly simple, we suggest a company like Betterment who makes this process easy. Fair warning: You’ll have to hop on the phone regardless of who you use — but Betterment will give you a script to follow." Another thing to like about Betterment is that they give you the option to choose a sustainable portfolio so your money goes into greener investments.
Once you've got your IRA account opened, you can contact your former employer to ask for a direct rollover. A direct rollover allows you to move your 401(k) without having taxes withheld, so it tends to be the best option for most people.
8.Alright, one last question. What happens if you took a loan out of your 401(k) that you're still paying back when you leave?
TL;DR? Every penny you've contributed to your 401(k) is yours, but employer contributions may not be, depending on the vesting schedule. Either way, it's often best to take these funds with you when you leave your job. You wouldn't leave your favorite coffee mug or your struggling desk plant behind, so don't abandon your retirement fund when you quit either.
For more stories about work and money, check out the rest of our personal finance posts.