When you leave one employer for another — or your company is acquired by another — you may wonder what happens with the retirement savings in your employer-sponsored 401k. Can you take it with you? Where does that money go?
Typically, you have several options for that retirement balance. It's important to understand what they are. Also, don't make any moves until you can take the time to compare your old employer's plan with your new 401k plan.
Here are your options.
Option 1: Keep your old plan (subject to plan’s rules).
You may choose this option if you feel your old employer's 401k plan offers better investment options or lower-cost options than your current one.
With this option, you can’t continue to contribute to your old employer's 401k plan. The existing balance will just continue to grow with your investments. To continue saving for retirement with your earnings, you will need to contribute to your new employer's 401k or another retirement savings plan. To get any potential match from your current company, you will need to contribute to your new employer's plan 401k plan.
Option 2: Roll over to an IRA.
You can roll over your existing balance in your old employer's 401k to a rollover IRA. Banks and brokerage firms offer these rollover IRAs, but make sure to compare fees, expenses, and investment choices before choosing a rollover IRA.
Just like in a 401k, your money can grow tax-deferred in a rollover IRA. One benefit of an IRA: You can withdraw money without penalty before the qualifying age of 59 ½ for certain expenses like home purchases or higher education tuition.
Option 3: Roll over to the new 401k plan.
You may be able roll over any existing balances in old employer's plan to your new company's 401k. Check with your Human Resources Department to find out if existing balances are automatically transferred to the new 401k plan.
The benefit of rolling over is that it’s easier to manage your retirement investments all in one place. But you’ll need to familiarize yourself with new plan's specific investment options, which may be different from your old plan’s. Also, make sure to get to know the new plan’s rules.
You don’t necessarily have a specified time to do this rollover. You can typically keep the balance in your old plan and roll over when you want as long as your old employer allows you to stay in its plan.
Option 4: Withdraw balance from your old employer's 401k plan.
You can also withdraw your balance from your former employer's plan, but you will likely pay taxes on that withdrawal and a 10% penalty if it’s considered an early withdrawal per IRS regulations (typically before age of 59 ½).
If you do a rollover...
Do a direct rollover — either into a rollover IRA or the new 401k plan. This means that your old 401k provider will send a check directly to the new IRA or 401k provider. The check will be made directly to the new retirement plan provider with instructions to roll over the balance. Do not have the check made payable to you because if you don’t execute the rollover correctly or on time, you could be on the hook for taxes and a 10% penalty.
Read more information and tips in our 401k section