Leaving Your Job? Here’s What to do With Your 401(k) and 403(b) Accounts

Have you changed jobs and left 401(k) or 403(b) accounts behind? If so, you’re not alone. Millions of people separate from their jobs every year. In 2023 alone, about 3.8 million people left their jobs every month, leaving behind 29.2 million accounts holding a total of $165 trillion in assets.^1,2

The fate of your employer-sponsored retirement accounts after you leave your job largely depends on the amount in your account at the time of your departure. If your account balance is under a certain amount, your ex-employer may elect to distribute the funds to you.

If your 401(k) or 403(b) balance is less than $7,000

• Balances under $1,000: Your former employer may cash out your account, a process known as a “de minimis” or “forced plan distribution” rule. For account balances under $1,000, these funds are typically withdrawn as taxable distributions and sent to the plan participant’s address.
• Balances between $1,000 and $7,000: Your employer may perform an automatic rollover to an Individual Retirement Account (IRA).

For balances of $7,000 or more, you generally have four options

1. Leave the account with your former employer

You may choose to do nothing and leave your account in your previous employer’s plan for investments that are low-cost or have limited availability outside of the plan. Other reasons might be to maintain certain creditor protections that are unique to qualified retirement plans or to retain the ability to borrow from it if the plan allows. The primary downside is that you can become disconnected from the old account and pay less attention to the ongoing management of its investments.

2. Rollover assets to an Individual Retirement Account (IRA)

Another choice is to roll assets into a new or existing IRA for potentially more investment choices and the ability to continue contributions (if you have earned income). The drawback to this approach may be less creditor protection and the loss of access to these funds via a loan feature.

3. Transfer the money to a new employer’s plan

Provided your new employer’s plans accept the transfer of assets from pre-existing plans, you may want to consider rolling over these assets to your new plan. The primary benefits are the convenience of consolidating accounts, retaining their strong creditor protections, and keeping them accessible via the plan’s loan feature. There are two types of rollovers – direct and indirect:

• Direct: In a direct rollover, the funds are directly transferred from the plan administrator to another account without the employee handling the funds. A direct rollover is generally considered the preferred approach for transferring funds from one retirement account to another without penalty and without creating a taxable event.
• Indirect: Funds are sent directly to the employee. To avoid income taxes and penalties, the full distribution amount must be redeposited into another qualified retirement account by a deadline – usually 60 days.

4. Withdraw the money as cash

The last choice is to cash out the account. However, taking a cash distribution may cost you now and later. If you are under age 59½, you may be required to pay ordinary income tax on the balance plus a 10% early withdrawal penalty. In addition, employers may hold onto 20% of your account balance to prepay the taxes you’ll owe. Depending on your age, you may pay taxes and penalties that greatly reduce your savings.

Before you leave, take these steps to ease the transition

Whichever option you choose, gather login information and contacts for your retirement accounts, check with HR for an exit packet detailing your retirement accounts, and note your vested balance to inform your decision on managing your retirement savings. Additionally, if you have a 401(k) loan, be aware that you might need to repay it quickly upon leaving your job to avoid taxes and a 10% penalty if you’re under 59½.

Your decision on handling your 401(k), 403(b), or other retirement accounts should align with your goals and preferences. Understand the rules and options for your old and new accounts, compare fees and investment options, and consider the tax implications. For more information, contact your wealth advisor. If you are not a client but would like to learn more, contact us.

¹ Federal Reserve Bank of St. Louis, March 2024.

² Capitalize. “The True Cost of Forgotten 401(k) Accounts (2023).” Capitalize, 14 May 2024.