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Changing Jobs: What to do with my Investments?

Changing Jobs with 401(k)

The other day I read that the median number of years people stay at a job is 4 ½. Assuming this is true, any one of us could have as many as 10 jobs or more in our working lifetime. For me, I’ve had roughly 10 already and I’m only 30…ish! In my defense, I worked four of those simultaneously while getting out of consumer debt in my 20s. Here’s the question: what happens to your old 401(k), Simple IRA, or SEP account when you leave that job or those last three jobs? What are your options? What’s the smartest thing to do?

Leave it?

Let’s start with what happens if you leave your account alone. If the balance is small – typically under $5,000 – and you don’t do anything with the account, after six months or a year that account could be automatically transferred into a Traditional IRA. You will not want this to happen - it becomes a complete hassle to track it down. It’s especially difficult because you don’t know which company holds it or how to contact them. They will auto enroll your investments for you, leaving you with no control over what’s happening. Sometimes, if the account value is under $1,000, the company might just cash it out and send you a check. This comes with a penalty (if you’re under 59 ½ years old) as well as the funds being taxed as ordinary income. Obviously, this is not a good option. If the balance is large enough, the account can continue to sit where it’s at. But, is anyone paying attention to it? If you’re not, then nobody is.

Take it with you

The best choice when changing jobs is to take your 401(k) account with you. No, I don’t mean cash it out and take the penalty and tax hit. You have two options to avoid taxes and penalties:

  1. Combine it with your new 401(k): You can combine it with your new 401(k), but you have to be sure that your new 401(k) accepts rollovers. One downfall is that sometimes you have to wait a certain period of time before you can utilize your new 401(k). Another downfall is that within your new 401(k) you’re limited in your investment options. But the good news is at least you’re keeping track of it and paying attention to how it’s invested.
  2. Move it into an IRA: In my opinion, the best option is rolling it into a Traditional IRA account (or a Traditional IRA and a Roth IRA if your previous 401(k) had a Roth option in it). Choosing this option allows you to maintain control over your investment dollars while also having a much larger selection of funds to invest. Doing a direct transfer into the new IRA account avoids taxes and penalties. You’ll need to open the new IRA account first, then complete direct transfer paperwork from your 401(k) custodian to push the funds into the new IRA account.

When it comes to your 401(k) and other retirement accounts, being intentional is crucial to success . Have a plan, work with a professional who can guide you and keep you accountable to that plan, and follow through with the execution. Without that, you’ll end up with the hassle of dealing with multiple 401(k) companies in retirement when you really just want to be sitting on a beach somewhere reading a good book and enjoying a cold drink. Oh wait, that’s my retirement plan!

Tawna Hermanson Tawna Hermanson is a Financial Advisor and has been a part of Financial Strategies Group since 2008.

Tawna serves as a Dave Ramsey SmartVestor Pro for North Dakota and Minnesota.

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Tawna Hermanson

Tawna Hermanson is a Financial Advisor and has been a part of Financial Strategies Group since 2008.

Tawna serves as a Dave Ramsey SmartVestor Pro for North Dakota and Minnesota.

SmartVestor logo

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