Four 401(k) Options When You Change Jobs

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By Emily Brandon

Workers who change jobs typically have four options for their 401(k) plan: leave it in the 401(k), roll it over to an IRA, move it into a new employer's plan or withdraw the cash and pay the taxes and penalties. Which option workers choose is influenced by inertia, income, wealth, debt and even whether workers already have an IRA account, according to a recent Employee Benefit Research Institute analysis of health and retirement study data about people age 50 and over. Here's a look at how workers decide what to do with their 401(k) balance when they change jobs:

Leave it in the plan. Leaving the money in a former employer's 401(k) plan is typically the default option. And 35 percent of older workers who remained in the labor force following a job change decided to leave their money where it was, the most popular choice. "It might also be a non-decision – a simple case of inertia, leaving the money where it already is, rather than making an affirmative choice, or deferring any decision until they need the money," Sudipto Banerjee, a research associate at EBRI, writes in the report.

%VIRTUAL-article-sponsoredlinks%Roll it over to an IRA. Rolling over a 401(k) balance to an IRA is also a popular choice, with 27 percent of older workers doing this when they switch jobs. People with large account balances of $100,000 or more are especially likely to move their nest egg to an IRA (47 percent), especially compared to people with balances under $5,000 (14 percent). Workers earning over $75,000 (30 percent) were also more likely to shift the money to an IRA than those earning under $25,000 (18 percent). And 31 percent of those with $80,000 or more in total assets deposited their 401(k) balance in an IRA, compared to just 15 percent of people with no other savings. Investors who already owned an IRA (34 percent) were much more likely to roll the money over than those who had not already set up an IRA (19 percent). "Those who already own an IRA should find it easier, or are more likely, to roll over their defined contribution account balance to an IRA," according to the EBRI report.

Withdraw your money from the plan. Some 18 percent of the older 401(k) participants chose to withdraw their money from the account upon changing jobs. Workers with small account balances were the most likely to receive a cash distribution. Nearly half (46 percent) of people with less than $5,000 in a 401(k) cashed out when they changed jobs, compared to only 10 percent of people with $100,000 or more in a retirement account. Low income workers were also more likely to withdraw money from the account. Nearly a third (31 percent) of those earning less than $25,000 cashed out, compared to 10 percent of those earning over $75,000. Cash outs increased when the account owner had debt, with 27 percent of those who owed between $3,000 and $10,000 and 24 percent of those with debts of $10,000 or more cashing out, compared to 12 percent of respondents with no debt. And nearly a third (32 percent) of those with zero or negative financial wealth cashed out their 401(k) account balance, versus 9 percent of investors with $80,000 or more in assets. Withdrawing the money before age 59½ typically results in a 10 percent early withdrawal penalty in addition to income tax on the amount withdrawn.

Move it to your new employer's retirement account. Workers are often eligible to transfer a 401(k) balance into a new employer's plan, but this is not a very popular option, with only 2 percent of workers shifting the money into a new firm's plan. Not all employers allow money from a former 401(k) plan to be transferred into the new plan, and some companies impose waiting periods before new employees are eligible to participate in the 401(k). And, of course, not all jobs offer 401(k) plans, so some people might switch to a job without a retirement account.

Emily Brandon is the senior editor for Retirement at U.S. News. You can contact her on Twitter @aiming2retire, circle her on Google Plus or email her at ebrandon@usnews.com.

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Four 401(k) Options When You Change Jobs
Is the position hourly or salaried? Is there an option for a bonus or the possibility of commission? Understand what portion of your income will be guaranteed and fixed vs. what's variable. Work to create a household spending plan on the fixed portion, or manage your finances on a variable income. It's important that you understand how your new income will affect your spending and goals.
Life happens, and you want to make sure you have time to enjoy it. Find out about the rules on vacation days and paid time off for medical appointments or unexpected events. Some companies combine all of your paid time off into a single time bank. Knowing the benefits package will clarify your understanding of what these events may cost you in terms of time or lost wages. And find out whether that vacation time offer is negotiable: Some companies may be more flexible about it than you'd expect.
Health insurance premiums can eat up a significant chunk of your monthly income. If possible, gauge what the company offers ahead of time and ask about the average cost of coverage for employees to compare to what you're currently paying. Company-provided life insurance or disability coverage can help supplement the coverage you buy for yourself, or cut your expenses for it.
Saving for your future is a priority no matter where you're working. Ask about company retirement plan options, such as a 401(k) and determine if there's a company match. (Free money!) If there isn't a 401(k) option, (or a match), recognize that's money out of your pocket. Then, look outside to setting up your own traditional or Roth Individual Retirement Account. Are there stock options or other company incentives?
Having clarity around expectations for performance and salary reviews will help you to gauge whether you can expect structure and streamlined growth, or if you need to proactively ask for reviews.
Are you in a position that requires you to hold a license and take annual continuing education credits? Will your new employer share or cover the costs for you to maintain these designations? Are there professional development or educational reimbursements for courses that will help you advance your skills within your new position? You'll want to know how much your company invests in its employees.
Corporate culture may not seem like a money-related question, but the price you can pay for a not having a flexible or family-friendly employer is significant. Knowing whether you'll be able to step away for a few hours one afternoon when your child is sick or if you'll need to secure paid care is something you'll need to factor into the family budget. A highly demanding job that will have you away from home or neglecting personal care could factor into higher costs to treat stress. The ability to telecommute from time to time can be a godsend both logistically and financially. So, evaluate how your current employer's culture impacts your lifestyle, and ensure you understand what changes you'd face if you joined your potential new company.
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