Does a 401k Follow You From Job to Job?

A 401(k) plan is a retirement savings vehicle offered by employers, allowing individuals to contribute a portion of their salary, often with an employer match, on a tax-deferred basis. When changing jobs, your 401(k) account does not literally “follow” you to a new employer, but the money you have saved remains yours. The former employer’s active management and contributions to that specific account cease upon your departure. You then have several choices about how to manage these retirement savings.

Automatic Status of Your 401k After Leaving a Job

Upon separating from service, your 401(k) account remains with your former employer’s plan administrator. No new contributions will be added to this account. The funds will continue to be invested according to your selections and may experience market gains or losses.

Plan administrators have provisions for managing accounts of former employees, especially those with smaller balances. If your vested account balance is below a certain threshold, your former employer might initiate an automatic action. For balances between $1,000 and $7,000, employers can perform an automatic rollover of your funds into an Individual Retirement Arrangement (IRA) in your name. If your vested balance is less than $1,000, the employer can cash out your account and send you a check.

Choosing How to Manage Your Old 401k

After leaving a job, you have several options for managing your former 401(k) funds. These include:
Leaving the funds within the old employer’s plan, if allowed.
Transferring the funds into a new employer’s 401(k) plan, if the new plan accepts rollovers.
Rolling over your old 401(k) assets into an Individual Retirement Arrangement (IRA), which can offer broader investment choices.
Cashing out the funds by taking a direct distribution, which has potential financial consequences.

Steps for Initiating a Rollover

Initiating a rollover requires careful attention to ensure a smooth transfer and avoid unintended tax consequences. Begin by gathering essential information from your former 401(k) plan administrator, including their contact details and your account number. If rolling funds into a new employer’s 401(k), obtain the new plan’s administrator contact information and rollover acceptance policies. For an IRA rollover, establish an IRA account with a financial institution and acquire its details.

Understand the distinction between a direct and an indirect rollover. A direct rollover, where funds transfer directly from your old plan custodian to the new custodian, is recommended to avoid mandatory tax withholding. In an indirect rollover, you receive the funds yourself and are responsible for depositing them into the new account within 60 days to avoid taxation and penalties. Your old plan administrator will require you to complete specific forms to request the rollover, which will include details about the receiving institution and the type of rollover desired.

Once all information is assembled and forms completed, contact your former 401(k) plan administrator to initiate the transfer. Submit the forms, specifying your preferred rollover type. For direct rollovers, funds are sent via electronic transfer or a check payable directly to the new custodian, ensuring you do not personally handle the money. If an indirect rollover is chosen, a check is issued to you, and you must deposit the full amount into the new qualified retirement account within the 60-day window to maintain its tax-deferred status. Confirm the transfer’s completion with both the sending and receiving institutions.

Details on Other Management Choices

Leaving funds in your old employer’s 401(k) plan is a common choice. The money remains invested within the plan, continuing to grow or decline based on market performance and your chosen investment options. While you can no longer make new contributions to this account, you will typically continue to receive plan statements and retain access to manage your investments within the existing framework. Some plans may charge ongoing administrative fees, which can vary based on the plan’s structure and the services provided, impacting your returns over time.

Cashing out your 401(k) involves taking a direct distribution of the funds. This distribution is generally subject to federal income tax at your ordinary income rate, and depending on your state, state income taxes may also apply. If you are under age 59½, an additional 10% early withdrawal penalty typically applies, unless a specific IRS exception is met, such as the “Rule of 55” for those who leave their employer in or after the year they turn 55. When cashing out, your former employer is generally required to withhold 20% of the distribution for federal income taxes.