So You’re Leaving a Job With a 401(k)? Here’s What to Do With That Cash
When Carrie Nowlin moved from Tampa, Florida to Little Rock, Arkansas, she left a job that provided her with a 401(k).
She couldn’t keep her money there; not because she didn’t want to, but because the provider, Ubiquity, has a policy of any balances under $5,000 being distributed back to the account holder upon termination, regardless of their consent or not.
After doing some research, she discovered that moving her retirement account to a new provider was one of her best options after she changed jobs –– not just because she had to.
Nowlin decided to open an IRA at her local credit union. The fees were lower than other options she researched, and she liked the idea of her money continuing to grow.
“The process was super simple and very straightforward,” says Nowlin. “I filled out the requested information (the new IRA account number is required for this step) and had the check sent to my credit union.”
In total, the process took about three weeks to complete and cost her $105: a $95 processing fee from her original provider and a $10 setup fee with her new one. On top of the fees, she also had to make a $100 initial deposit in her new account.
Not many people know they can take their 401(k) money with them when they leave an employer. Since the money is already invested and doing its thing, they should just leave it where it is and let the stock market work its magic, right?
Wrong. In fact, it could end up costing you more to keep that old account.
What Is a 401(k) Rollover?
Commonly referred to as a 401(k) rollover, moving your money after you leave a job can save you –– and potentially make you more –– money in the long run.
A 401(k) rollover is simple: It’s taking your money out of an employer-sponsored retirement account and moving it into a new retirement account.
Todd Burkhalter is the founder and CEO of Drive Planning, a financial planning and wellness company. He’s been helping people manage their money for the past 21 years.
Burkhalter says having the opportunity to rollover a 401(k) is one of the best money moves an individual can make. As he describes it, it gives individuals the chance to “take control” of their money.
The downside of having a 401(k) plan, according to Burkhalter, is the plan is administered and run by a company that the employer has chosen. From the participant’s standpoint, Burkhalter says you’re not in control of your own money. Your employer can make strict allocation requirements, and the provider can charge costly administrative fees.
For you, that means paying money just to have your money invested –– and risking a horror story happening, like one that happened to one of Burkhalter’s clients.
“I had a client who was let go from his company during a merger, and he didn’t rollover his 401(k),” says Burkhalter. “The new company required that 50% of anyone’s 401(k) balance had to be in their own company stock.”
Instead of rolling over the 401(k), Burkhalter’s client adjusted his allocations and kept his funds where they were. Unfortunately, the new company failed, and Burkhalter’s client lost 50% of his retirement savings.
There’s only a handful of times when individuals can withdraw from their retirement accounts early without being penalized, such as financial hardship or disability. To avoid getting stuck with your old employer — and a horror story unfolding — Burkhalter says it’s best to decide what to do with that money from the get-go.
Where Can You Put Your Money Instead?
So, you left your job and are looking for a new one. You understand the benefits of rolling over your 401(k), but what now? Where do you put that money?
There are three main types of 401(k) rollovers:
401(k) to Traditional IRA
Anyone can open a traditional IRA, regardless of their income or employment status. As of 2018, these accounts have annual contribution limits of $5,500 a year or $6,500 if you’re 50 or older — your rollover amount has no impact on this contribution limit. Depending on your situation, you may not pay taxes on IRA contributions, but you do pay them on any pre-tax contributions and all gains when you withdraw money.
401(k) to Roth IRA
A Roth IRA is for people who make less than $132,000 a year, or $194,000 if they’re married. Like the traditional IRA, a Roth IRA has yearly contribution limits of $5,500 or $6,500 if you’re 50 or older, and your rollover amount doesn’t impact the contribution limit. Since contributions are made after income tax is taken from your pay, you pay no taxes when you make qualified withdrawals.
401(k) to 401(k)
This one is pretty self-explanatory. A rollover into a new 401(k) does not count as a contribution, so there is no maximum amount you can rollover. Contributions are, however, limited to $18,500 a year in 2018. It is important to note that fees vary by provider. To initiate a rollover into a new 401(k), contact your current 401k) provider for instructions.
If you’re still unsure where to put your retirement funds, Burkhalter advises his clients to put it wherever the fees are lowest. Every dollar paid toward your provider is one less dollar invested for retirement, so choose wisely.
Kelly Anne Smith is an email content specialist for The Penny Hoarder. Catch her on Twitter at @keywordkelly.