401(k) FAQs – What To Do After Leaving A Job

Accountancy Resources

401(k) FAQs – What To Do After Leaving A Job

Careers Retirement Author: Admin


Leaving a job, whether voluntary or involuntary, often brings with it a number of headaches and obstacles that must be addressed. Dealing with retirement plans, health insurance, and other company benefits during this transition can be a nightmare. Most employees have questions about retirement plan accounts and what options are available for those accounts, and it’s often difficult to find answers.  Fortunately, there are a number of options for (k) accounts and some easy steps to take if you know who to ask and what to look for.

Can I Take My 401(k) With Me?

Not only can you move your 401(k) when you leave a job, this is often the best option.

When separating from an employer for any reason, employees with vested account balances have plenty of options for that account. Some employers may allow you to leave the account within the current plan. This is sometimes the easiest choice to make since there is minimal paperwork involved. But one of the downsides to a 401(k) plan, to begin with, is the lack of investment choices available within the plan. By leaving the account in the former employer’s plan, you are limited to only the same investment funds that were available to you as an employee. While you may be happy with those choices, you could potentially access a universe of thousands of investment options by rolling your account out of the old plan into an IRA. It is important to first find out whether your account can be left in the current plan before assuming this option is available to you. This may not always be an option, and even if it is, they may charge you higher administrative fees for continuing to hold your account in the plan.

What Choices Do I Have If My New Employer Also Offers a 401(k) Plan?

Some 401(k) plans offer employees the ability to roll account balances from previous employer plans into the new company plan. In order to find out if this option is available with your new employer, an office manager or human resources contact is the first place to turn. They will be able to provide you with the forms and processes for moving your old 401(k) into the new plan or they will provide you with the contact information for the plan administrator who can assist you. This will allow you to keep all accounts in one place, consolidating account statements and making investment decisions easier.  Before attempting to do this, make sure you do not have an outstanding loan on your 401(k).

Are There Any Taxes or Penalties For Moving My 401(k)?

While there are tax ramifications of withdrawing money from a 401(k) or other retirement accounts, there are no penalties or taxes for moving the account into a new retirement plan or an Individual Retirement Arrangement (IRA). If money is withdrawn directly and not rolled into another retirement account, the money withdrawn will be treated as ordinary income and will be taxable. Further, if you are under age 59 ½, this will be deemed an early withdrawal, and you will be assessed a 10% penalty in addition to any taxes owed. It is important to ensure that any account balances are rolled into a new employer’s plan or IRA rather than withdrawn directly to avoid taxes and possible penalties.

What Happens If I have an Outstanding Loan From My 401(k) When I Leave My Job?

Unfortunately, retirement plans were not created to be treated as a source of emergency funds, so loans taken from them are treated with strict rules. If you are terminated or leave the company voluntarily with an outstanding loan balance and cannot repay the balance, you will be taxed on the amount of the loan as if it were a direct withdrawal. The amount of the loan will also be subject to the 10% early withdrawal penalty if you are under 59 ½. However, if your company is acquired or merges with another company, you may be able to roll the loan into the new employer plan. Check with your new company’s plan administrator to find out.

Whether you decide to leave your old 401(k) account with your previous employer, transfer it into the retirement plan with a new employer, or roll it over into an IRA, make sure you take the steps necessary with the former plan administrator, new plan administrator, or financial advisor to ensure the rollover is completed properly to avoid any unnecessary taxes or penalties.