If you want to know what happens to your 401k when you quit, this article is perfect to read. It explains a lot about your 401k and exactly what happens to it when you quit your job.
It wasn’t too long ago that an individual could go to work for a company and 40 years later find themselves still employed with that same company.
Of course, the business landscape has changed and many companies are involved with mergers, transferring ownership, or downsizing their employee’s workforce.
This of course is unsettling for an employee and may cause that same individual to seek other employment.
The question then arises on how to handle a 401(k) that may have been offered by that company if the employee quits or is downsized.
Importance of Asking What Happens to 401k When You Stop Working
This of course is an important question that needs answers because a person’s 401(k) is part of their retirement future.
It is critical to remember that the 401(k) is your benefit and one that nobody can take away from you.
This is regardless of how much the contribution was by your employer or how much you contributed to your future. Your 401(k) is your 401(k).
Therefore, a discussion of various options that the employee can take as it relates to their 401(k) can be meaningful.
Included in these options are maximizing your investment and minimizing any potential expenses associated with your decision on what to do with your hard-earned retirement money.
Related: Can I Retire at 60 With 500k?
To ensure that we are all on the same investment page, a quick summary of what a 401(k) is would be helpful.
A 401(k) is an employee benefit that is offered by the employer as a way to recruit quality employees. It is a very good benefit made available in some workplaces since 1978.
If the employee contributes a certain percentage of their salary to a 401(k) plan, the participating company will match that contribution up to a certain ceiling or percentage limit.
For example, if the company has a 401(k) plan and says that they will match 4% of your contribution to the 401(k) plan, you can match that same 4% investment.
It is, of course, a great benefit and the bottom line is it provides an added 4% to your salary.
There are limits as to how much one can contribute to their 401K yearly.
The investment vehicle or where the 401K is invested is selected by the employer. A 401(k) plan is also defined as a qualified retirement plan according to the definition by the Internal Revenue Service.
Both the investment by the company and the employer is owned by the employee and because of it being invested there is a modest to good return on that investment.
Taxes are not realized until the employee starts to withdraw from his or her 401(k).
What Happens to Your 401k When You Quit Your Job
Option #1: Staying Put
So, the day comes when you move on from your current place of employment and seek other employment elsewhere.
Perhaps it is your choice, or you are a victim of downsizing or perhaps you’ve been fired.
In any case, given these three scenarios, you are no longer considered an employee of the company.
Being the positive person you are has been an experience and you have been a good employee, worked hard for the company, and been a team player.
So, the question arises, you are leaving, and therefore what happens to your 401(k)?
First of all, it is essential to understand that the money in your 401(k) account is yours!
It does not belong to the company it does not belong to the other employees it belongs to you, and it is yours because you have earned it and contributed faithfully to its growth.
So, the first option you have is just to leave the money exactly where it is!
This may be a good strategy if you are comfortable with the return on your investment and you want to continue the growth that you have experienced.
However, like all normal rules, there may be a slight variation on this one.
Specifically, if with the company you have contributed less than $5,000 to the 401(k) you’re now the previous employer can tell you that you are no longer allowed to utilize their investment vehicle.
This simply is a matter of economics as it does cost the company certain administrative fees to manage the 401(k) plan for their employees.
Also, there may be that off chance that if you contributed less than $1,000 to the 401(k) plan, they may just simply issue a check to you in the amount that was contributed.
Option #2: Take the Money and Run
Another option that the former employee can take in regard to their 401(k) is to withdraw the money and keep that amount in their checking, money market, or savings account.
This may be a consideration if the individual is fearful or apprehensive about what the employment future may hold for them.
Perhaps there is no money to fall back on and the mortgage and other bills are due as well as putting food on the table.
And so, the individual may simply wish to pocket their 401(k) and use it as a cushion until the next job opportunity comes along.
This is certainly an option but probably the worst option of the three. That is because the IRS’s financial eyes widen in anticipation due to the penalties and fees associated with this option.
As you recall this investment money was all tax-deferred and if pocketed now those taxes and penalties are assessed.
How does only receiving 50% of your 401(k) sound to you?
Yes, that is a strong possibility as the IRS may end up taking half of your 401(k) if you hang on to your nest egg.
It is true that once the money is disbursed from your 401(k) and you receive it you have 60 days given to you by the IRS to roll it over into a qualifying account.
And so, one may think that they have time to borrow that money for a little bit and then accumulate the spent money and roll the entire amount over into another qualifying investment vehicle in keeping with the 60 days.
However, beware. Sometimes the best-laid plans of mice and men fall apart and if you come up short at that 60-day deadline you will be assessed penalties and taxes.
Option #3: Take the Money and Invest
The final option for an individual who has left their employment and has a 401(k) with their previous employer is to withdraw the money and roll it over into a new IRA.
Under this option, there are a couple of other possibilities on what the individual could do with the 401(k).
If they were to be offered a new place of employment and that place of employment also offers to their employees a 401(k), you may be able to roll your previous investment into the new 401(k).
Of course, it is contingent upon whether the new employee’s plan allows for that to happen.
If the option of rolling your previous 401(k) into your new employer’s 401(k) occurs, it will come with limiting variables to consider.
Those variables include being restricted to the option of investing those monies as indicated by the new employer. Also, you would not be able to negotiate or rework any fees that are associated with the 401(k) plan.
According to 401(k) rules, a positive variable to choosing this option is that if a financial distressing situation occurs in your family, you have the option of taking out a loan against your 401(k).
Another investment possibility is to take the 401(k) and work with an investment company and move the money into an IRA. Investment firms that can help facilitate this option include Fidelity.com or Vanguard.com.
With this option, you would be able to conduct your research regarding various investment firms and determine what investments you wish to choose and make your own decision regarding associated fees.
Also, if you wish to simplify your portfolio, perhaps rather than having money invested in many investment vehicles you may choose one fund for your investments.
This will simplify your investment portfolio.
You Can Take it With You When You Go
What’s mine is mine and what’s yours is mine. This pretty well sums it up when you have a 401(k) with a company and for whatever reason, you leave that company’s employ.
Additionally, because it is your 401(k) you have several options that you can exercise once you leave a company’s employment.
Those three options, in summary, include leaving the 401(k) right where it is, drawing it out and rolling over into another tax shelter vehicle, or use any portion of that money as you see fit.
Of course, with the latter option, there will be penalties and fees assessed according to the American tax code.
Above all, the former employee needs to realize that no matter what the circumstances are regarding their no longer being employed with the company, that this does not devalue that person.
A person’s worth is more than the summary of their checkbook or savings account, their 401(k), or whether they have been downsized or let go.
Their value as an individual and the summation of their experience far outweighs any monetary value.
Therefore, whatever situation the individual finds themselves in when they depart a company, it is important to allow or let cool heads prevail.
It is paramount to know that an opportunity will come along and that the money you have set aside in a 401(k) should be respected and appreciated.
Consequently, it is important as much as possible not to invade the hard work and efforts accomplishments in growing that 401(k) and honoring the saving sacrifices that were made.
Having experienced the reality of unexpectedly losing a job, at the moment the future seemed rather bleak.
Through this prism of no job on the near horizon and the temptation of dipping into my 401(k) was a strong consideration.
However, it was important to weigh all of the pros and cons about the availability of this money and the various options that were afforded me.
Consequently, maintaining being level-headed and looking at all of the possibilities of whether to draw on this money or whether to leave the investment money alone was the financial crossroads at this difficult time of unemployment.
If facing this scenario, below are offered the various pros and cons associated with what happens to your 401(k) when you quit or leave employment.
What you do, of course, is totally up to you. It is important though to think the situation through, weigh all of the pros and cons and make a rational decision and one that is not based on the fear of the future.
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Life happens. The various circumstances that occur in our life can sometimes be labeled as good and sometimes can be labeled as bad.
That is a natural human tendency to judge those circumstances in our lives.
The bottom line, however, is that it is not what happens to you that is important it is how you respond or what you do with those circumstances when life intervenes.
One of those traumatic circumstances can be leaving one’s present employment position.
The important thing to realize is that if there is a 401K involved not to look at this investment through the prism of human judgment but to view it through the prism of accounting black-and-white.
In other words, what is the best financial decision of what to do with that 401(k) when you leave your job and evaluate your decision by minimizing fees and taxes?
Reading this article will really help you best answer this and other related questions!