ELLEVEST INSIGHTS

So you quit your job. Or maybe you were laid off. Or maybe you were even fired? Whatever happened, you’re moving on. That job is behind you, and your future is looking bright — whether new opportunities are around the corner, or you’re taking time to contemplate your next moves.

Just one piece of your old job is still up in the air — the 401(k) that came with the job, and all the money you invested in it. What happens to that account now? And what do you need to do about it?

What is a 401(k) again?

Let’s refresh: A 401(k) is a specific type of investing account that lets you put money away for retirement with some sweet tax benefits. There are two main 401(k) types: traditional (aka pre-tax) and Roth.

If you have a typical 401(k), it’s because your employer offered it as a benefit. Any contributions you make to your 401(k) come directly out of your paycheck. (You might also get a 401(k) employer match — meaning your employer contributes money to your 401(k), too.)

What happens to my 401(k) if I quit? Does it follow me?

When you quit your job, you won’t be able to contribute to that particular 401(k) anymore, because it’s tied to your employer. But the money already in the account is still yours, usually, so it can just sit in that account for as long as you want — with a couple of exceptions:

• First, if you contributed less than $5,000 to that 401(k) while you were with that employer, they can legally tell you, “Closing time! Your money doesn’t have to go home, but it can’t stay here.” (It costs them money to maintain every account, after all.)
• If you contributed between $1,000 and $5,000, your employer might move your money into an IRA, a move otherwise known as an involuntary cashout.
• If you contributed less than $1,000, they might just mail you a check for that amount. If that happens, you should deposit it into another retirement account ASAP so that you don’t get hit with a penalty from the IRS (more on that below).

Also relevant: If you had 401(k) matching, be sure to check whether there was a vesting schedule attached. If so, you only get to keep the employer contributions that had fully vested as of your last day. Your employer gets to take back any unvested contributions. If there was no vesting schedule — in other words, if 100% of employer contributions vested immediately — then it’s all yours. (Of course, any money you put in yourself is always yours either way.)

So what should I do with this 401(k) now?

Usually, your 401(k) contributions can stay put in your old account, but does that mean they should? That depends. You’ve got options:

You could withdraw the money

Technically, you’re allowed to withdraw your money from your old 401(k), but unless you’re facing some really dire financial circumstances, we advise against it. Early withdrawal comes with big penalties from the IRS, on top of whatever taxes you’d owe on the money. (This also applies if your old employer mails you a check for the balance of your old 401(k) and you don’t deposit it into another retirement account.) In all, you could end up paying as much as 50% of the balance in your account to pull from it. Yeah … ouch.

You could do nothing

Then again, you might not want to leave your old 401(k) where it is. It could just be for your own sanity. The more investment accounts you have, the more logins you have to remember, the more tax documents you have to wait for, the more addresses and beneficiaries and email addresses you have to keep up to date.

Also, when you have all your investments in one place, it’s a lot easier for your advisor to (a) help you make sure that your investment portfolio is properly diversified, and (b) forecast whether you’re on track to hit your goals, like we do for you at Ellevest. Here’s a helpful guide on how much you should contribute to your 401(k).

If you’re starting a new job that offers a 401(k) and their plan allows it (most do), then you might be able to combine your 401(k)s by rolling over your old one into the new one.* A rollover might be a good choice especially if your new 401(k) has particularly low fees or unique investment options.

If you aren’t opening a new 401(k), or if you just want more choices about what kinds of things you invest in or the fees you’ll have to pay, then you could roll over your 401(k) into an IRA instead, be it one you already have or a new one altogether. (Yep — we do that at Ellevest. And if you are looking to get on track to reach all of those big, overlapping financial goals, our Comprehensive Planning Package and Financial Foundation Packages were made for you.) Here’s an article that lists out the pros and cons (and rules) of rolling over into a new 401(k) vs an IRA.

The good news is, there aren’t really any “wrong” answers. No matter what you do with your old 401(k), the fact that you’re thinking about the options and making a decision means you’re looking out for Future You. And that’s really what this is all about.