Don’t forget about your old 401(k) if you quit a job or are laid off. What departing workers need to know


When you leave your job, don't forget about your 401(k) plan. As more workers leave their jobs and companies start layoffs, some departing employees may be leaving behind an employer-sponsored retirement plan. If you have a 401(k) or similar workplace retirement plan, it's important to know what happens to your account when you leave and what your options are. 

You have three basic choices for an old 401(k): leaving it where it is, rolling it into your new workplace plan or an individual retirement account, or cashing it out. Cashing out is usually not recommended, as you may be subject to taxes and a 10% penalty if you're younger than 59 ½. If you choose to leave your 401(k) with your old employer, be aware that it may be difficult to find the account in the future. 

Congressional legislation known as Secure 2.0 includes a provision for a retirement account “lost and found,” and large 401(k) plan administrators such as Fidelity Investments, Vanguard Group and Alight Solutions also have their own lost and found services.

If the balance of your 401(k) account is between $1,000 and $7,000, your ex-employer can roll over the amount to an IRA. If the balance is less than $1,000, the plan can cash you out, which may result in a tax bill and an early-withdrawal penalty.

 An alternative to a rollover to a new workplace plan or an IRA is to transfer the balance to another qualified retirement plan, such as the 401(k) at your new employer if the plan allows it. The main benefit of this option is that it simplifies the process of managing your accounts and reduces the amount of effort required to keep track of them. However, if you choose to roll it over to an IRA, you may have more investment options but may also face higher fees, which can reduce your retirement savings.

 No matter what you decide to do with your old 401(k) plan, be aware of some of the potential “exit costs” related to it. For example, while any money you put in your 401(k) is always yours, the same can’t be said of employer contributions. Vesting schedules, determine how long you must stay at a company for its matching contributions to be 100% yours, ranging from immediate to up to six years. Unvested amounts are usually forfeited when you leave your company. Additionally, if you have taken a loan from your 401(k) and haven’t repaid it when you leave your company, the plan may require you to repay the remaining balance quickly. Otherwise, your account balance will be reduced by the amount owed and considered a distribution. It is important to speak to a financial advisor before moving your old 401(k), as there may be planning consequences. For example, the Rule of 55 allows penalty-free distributions from your current 401(k) if you leave your job in or after the year you turn age 55. If you move the money to an IRA, you generally lose the ability to tap the money before age 59½ without paying a penalty. Additionally, if you are the spouse of someone who plans to roll over their 401(k) balance to an IRA, you would lose the right to be the sole heir to that money.

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