If you left your 401(k) with a previous employer, you’ll need to wait until you’re 59 ½. However, this is only valid if you’re accessing the 401(k) from your current employer.
If you are over 55 but not yet 59 ½, you may take penalty-free distributions from your 401(k) but not an IRA. Your distributions will, however, be taxed at your normal income tax rate. If you’re over the age of 59 ½ and decide to retire after leaving your job, you may start taking qualified distributions from your 401(k) or IRA without being charged an early penalty fee. For example, if you were to be sued, some states would allow money in IRAs to be collected - but not if it was in a 401(k). The drawbacks of an IRA is that you’ll lose some hardship distribution options as well as “qualified” status, which means less protection of your assets. If you choose to withdraw money from a rollover IRA, it may be used for a qualifying first-time home purchase (up to $10,000) or higher education expenses in addition to the exceptions for 401(k)s. You may have other investments and can now move this money to the same brokerage so that everything is in one plan, which consolidates logins. You also have direct access and more control over your investment options. The main benefit of an IRA versus a 401(k) is more flexibility in withdrawing money penalty-free before reaching the age of 59 ½. This is a common choice for people who are leaving the workforce or for those who don’t have an employer that offers a 401(k) plan. You’ll do this with a bank or brokerage firm separate from your employer. Instead of keeping your funds in a 401(k), you may also choose to roll over your plan into an IRA. Option 3: Roll Over Your 401(k) Into an IRA Make sure you’re making the most of your new 401(k) plan by knowing all your options and seeing if your new plan is better or worse than what was available at your previous employer. Look into your new company’s 401(k) matching program, if there is one. The 60-day rule applies again here: If the funds aren’t deposited into a new 401(k) after this time, you’ll pay income tax on the entire balance.īefore transferring your funds to a new 401(k) plan, make sure you understand your new plan’s rules, fees, and investment options. Typically, this is done through a direct transfer or having your employer automatically transfer your 401(k).Īlternatively, you may opt for your employer to mail you a check for you to manually deposit into your new 401(k). The most common route people take is rolling over their 401(k) to their new employer. Option 2: Roll Over Your 401(k) To Your New Employer For these reasons, many people - particularly those new to the workforce - choose to roll over their 401(k) to their new employer. Additionally, you’re still locked in to the funds that plan offers, which may be limited and expensive. Your old employer may also charge administration fees on the account now that you’re no longer an active participant. For example, you won’t be able to make any more contributions to the account, and you may also not be able to take out a loan on your 401(k). Leaving your retirement savings with your old employer has its drawbacks. If they issue you a check, it’s crucial that you transfer the funds into a new 401(k) within 60 days, or else you’ll have to pay income tax on the distributed balance. However, if you have less than $5,000 in retirement savings, your company may force you out by issuing you a check. Many are surprised to learn that in certain circumstances, you can leave your 401(k) with your old company’s retirement plan. With this in mind, you have the following options for your 401(k) when quitting your job: Option 1: Keep Your 401(k) With Your Old Employer Refer to this chart from the IRS to learn more about account rollovers. You’ll also want to keep in mind the fact that some account types only allow one rollover per year - so if you’re changing jobs frequently, this is something to be aware of. Some companies offer special options here, so you should always check with your 401(k) administrator and plan documents. 401(k) loans are appealing because they don’t affect your debt-to-income ratio - however, if you can’t repay it by the tax due date after leaving your job, you’ll be taxed on the balance and charged an early withdrawal fee. Each of the options above has benefits and drawbacks, and you should carefully consider what’s best for you.īefore you decide what to do with your 401(k), make sure you don’t have a loan on your 401(k). If you’re considering quitting or transitioning jobs, you may be wondering what to do with your 401(k). When you quit your job, you have five options for your 401(k):
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