Four 401(k) Options When You Change Jobs

How to decide whether to take or leave a 401(k) account with a former employer.

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Retirement Fund
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By Emily Brandon

Workers who change jobs typically have four options for their 401(k) plan: leave it in the 401(k), roll it over to an IRA, move it into a new employer's plan or withdraw the cash and pay the taxes and penalties. Which option workers choose is influenced by inertia, income, wealth, debt and even whether workers already have an IRA account, according to a recent Employee Benefit Research Institute analysis of health and retirement study data about people age 50 and over. Here's a look at how workers decide what to do with their 401(k) balance when they change jobs:

Leave it in the plan. Leaving the money in a former employer's 401(k) plan is typically the default option. And 35 percent of older workers who remained in the labor force following a job change decided to leave their money where it was, the most popular choice. "It might also be a non-decision – a simple case of inertia, leaving the money where it already is, rather than making an affirmative choice, or deferring any decision until they need the money," Sudipto Banerjee, a research associate at EBRI, writes in the report.

Roll it over to an IRA. Rolling over a 401(k) balance to an IRA is also a popular choice, with 27 percent of older workers doing this when they switch jobs. People with large account balances of $100,000 or more are especially likely to move their nest egg to an IRA (47 percent), especially compared to people with balances under $5,000 (14 percent). Workers earning over $75,000 (30 percent) were also more likely to shift the money to an IRA than those earning under $25,000 (18 percent). And 31 percent of those with $80,000 or more in total assets deposited their 401(k) balance in an IRA, compared to just 15 percent of people with no other savings. Investors who already owned an IRA (34 percent) were much more likely to roll the money over than those who had not already set up an IRA (19 percent). "Those who already own an IRA should find it easier, or are more likely, to roll over their defined contribution account balance to an IRA," according to the EBRI report.

Withdraw your money from the plan. Some 18 percent of the older 401(k) participants chose to withdraw their money from the account upon changing jobs. Workers with small account balances were the most likely to receive a cash distribution. Nearly half (46 percent) of people with less than $5,000 in a 401(k) cashed out when they changed jobs, compared to only 10 percent of people with $100,000 or more in a retirement account. Low income workers were also more likely to withdraw money from the account. Nearly a third (31 percent) of those earning less than $25,000 cashed out, compared to 10 percent of those earning over $75,000. Cash outs increased when the account owner had debt, with 27 percent of those who owed between $3,000 and $10,000 and 24 percent of those with debts of $10,000 or more cashing out, compared to 12 percent of respondents with no debt. And nearly a third (32 percent) of those with zero or negative financial wealth cashed out their 401(k) account balance, versus 9 percent of investors with $80,000 or more in assets. Withdrawing the money before age 59½ typically results in a 10 percent early withdrawal penalty in addition to income tax on the amount withdrawn.

Move it to your new employer's retirement account. Workers are often eligible to transfer a 401(k) balance into a new employer's plan, but this is not a very popular option, with only 2 percent of workers shifting the money into a new firm's plan. Not all employers allow money from a former 401(k) plan to be transferred into the new plan, and some companies impose waiting periods before new employees are eligible to participate in the 401(k). And, of course, not all jobs offer 401(k) plans, so some people might switch to a job without a retirement account.

Emily Brandon is the senior editor for Retirement at U.S. News. You can contact her on Twitter @aiming2retire, circle her on Google Plus or email her at ebrandon@usnews.com.


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