Leaving a job? Make a plan for your 401(k) savings

Quick takeaways

If you’re leaving a job that had an employer-sponsored retirement plan such as a 401(k) you'll have options, with pros and cons for each, for what to do with those funds.

Rolling those savings over into an IRA, keeping them in your current plan, or rolling them into a new plan helps you continue to make progress on your retirement savings goals.

If you instead cash out your retirement savings funds, you may be liable for taxes and penalties.

If you’re changing jobs or planning to retire, you have lots to think about and plan for. One big decision, if you’ve had an employer-sponsored retirement plan like a 401(k) or 403(b)? What to do with the savings, and possibly matching contributions from your employer, that you’ve built up.

Your options for those funds differ whether you’re changing jobs or retiring. And your preferences for what to do with that retirement savings account also depend on your short- and long-term goals, immediate needs for cash, and ability or desire to continue with retirement savings. Let’s take a closer look at each option.

1. You may be able to keep your money in your current 401(k) or 403(b) plan.

If allowed, you may be able to leave your retirement savings where they are, in your previous employer’s plan, even if you no longer work there or are retiring. Those tax-deferred funds may still grow, although you’ll be unable to make new contributions. Investment options will still be set by your employer, although you’ll be able to change them as needed. A guideline: Review those options annually, adjusting to align with your goals and rebalancing your asset allocation, too. Your HR department can tell you if your plan allows this option.

2. You can roll your savings into an IRA.

A second option with your 401(k) or 403(b) savings: Roll them into an individual retirement account (IRA), either one you already have or a new account you open. IRAs are also tax advantaged, meaning you won’t pay income taxes until you withdraw the funds in retirement. You can do this whether you have another job or are retiring.

To move your funds into an IRA, you’ll have to contact your previous retirement account provider and request a direct rollover to your IRA. Then, you’ll be able to choose from investment options and, if you’re still earning income, make contributions to the IRA, up to limits established each year by the IRS.

3. You may be able to move your money to your new employer’s plan.

If you’re leaving one job to start another and have an employer-sponsored retirement plan at your new employer, you may be able to move your previous savings into your new plan. To do this, contact your new plan provider first; you’ll request a direct rollover from your previous 401(k) or 403(b) to your new one.

If you move your money to a new employer-sponsored retirement plan, those savings will continue to grow tax-deferred, and you may be able to continue contributions through payroll deductions. You’ll also consolidate savings into one account, making it easier to track how well you’re progressing toward your retirement goals. As with other choices, after you’ve moved the funds, take a look at the investment options and choose what best aligns with your goals.

4. You may withdraw your balance as cash.

Taking your savings as a lump-sum cash distribution is another option, with a bigger financial impact than the others. To do this, you withdraw all the funds from the account at once. While you gain immediate access to your money, that full balance is generally subject to income taxes and additional withdrawal penalties, if withdrawn early. You’ll also permanently remove those dollars from your retirement account savings, and may miss out on any future investment growth or earnings.

A few things to consider (and do) before making a choice for your 401(k)

Vesting: Your previous 401(k) or 403(b) includes your contributions and, perhaps, employer contributions. While the contributions you made to your retirement savings always belong to you, employer contributions become yours over time through a process called vesting. Vesting simply means you earn a certain percent of those contributions over time, as you’re employed. Whether or not you’ve fully vested will affect the total balance of your retirement savings. Your plan documents or HR department can help you find out about your previous employer’s vesting schedule.

401(k) loan: If you took a 401(k) loan while working for your previous employer, you may have to repay the remaining balance within a short period of time, depending on the plan’s rules. If you don’t repay the loan, the unpaid amount may be treated as a distribution and could be subject to both income taxes and, if you’re under age 59½, a 10% early withdrawal penalty.

Account details: Before you leave your job, make note of your login details and contact information. (The HR department may provide an exit packet with these items.) If you choose to keep your savings in your old employer’s plan, keep your contact information, including address and non-work email, up to date.

What’s next?

From tax implications to investment opportunities, each option for your 401(k) has nuances to consider including advantages and disadvantages to both - Learn more details on each choice (PDF). Principal offers IRAs—both traditional and Roth—that have a variety of investment options and can be self-directed or managed for you.