Have You Joined the “Great Resignation?” What to Do With Your 401(k)

Have You Joined the “Great Resignation?” What to Do With Your 401(k)

Workers everywhere have been fleeing their jobs in droves. If you’ve joined the so-called “Great Resignation,” you might be delighted at what you’ve left behind, whether it’s a nagging boss, an inflexible schedule or monotonous assignments. But you also might have left behind a chunk of change in your 401(k).

Whether you’re looking to start a new business, find a different position or have assumed caregiving responsibilities that preclude a new role, you might be wondering what to do with these hard-earned savings. There are four options available (only three if you don’t have a new job), and the right one for you depends on your goals and financial circumstances.

Here is what you need to know to assess your options.

1. Roll over your 401(k) to your new company’s plan (assuming they offer one).

When you left your old company, you took your pictures and favorite coffee mug. Why not take your 401(k) too? But before you move forward, make sure the new plan fits what you need. Take the time to read up and compare the old and new plans to determine which one offers the most attractive investment options and fee structure.

(At this point, if you decide that the old plan is preferable, take a look at options 2 and 3 below. If you’re considering joining your new plan, read on.)

While most companies will allow a rollover, they may require you to work there a certain length of time before you are eligible. Assuming that you can proceed, you will need to decide if you want a “direct” or “indirect” rollover. There are some key nuances so it’s important to understand the differences.

With a direct transfer, your previous plan will deposit your balance directly into your new account. Talk to your new employer about the process and what information you need, such as the name of plan and custodian, account number, transfer instructions, etc. Complete the paperwork, and they will handle the rest.

With an indirect transfer, the plan issues the check to you, rather than putting it into your new plan, and you have 60 days to deposit the funds without incurring a penalty and income taxes. But here’s where the indirect route can get tricky: If you choose this option, your previous employer will retain 20% of the amount that is pending transfer to pay any taxes that might be due. That means you will need to come up with that 20% from other sources in order to avoid taxes and penalties. Then when you eventually complete the rollover, you will receive that money back as a tax credit. It’s a little confusing, but here’s an example that can help clarify.

Say you have $10,000 in your retirement account and you choose the indirect method. Your plan administrator would keep 20% ($2,000 in this case) so you would receive $8,000. However, to avoid taxes and penalties, you’d need to deposit the entire $10,000 into a new account, which means you would need to come up with an additional $2,000. If you deposited it within the 60-day grace period, you would receive the $2,000 back when you file your taxes the following year.

Even if you decide not to move your money, you should still open a plan at your new employer…particularly if they offer a “match,” which means they are contributing money to your retirement account in addition to what you put in. In other words, it’s essentially free money that you don’t want to miss out on. But even if a 401(k) match is not part of your compensation package, you should still continue saving for retirement in a tax-advantaged plan.

2. Leave your 401(k) at your previous employer.

While this is the default choice if you don’t indicate otherwise, you may actively decide it’s in your best interest to leave your funds where they are. First, make sure that you can: Typically if your account is less than $1,000, your old employer will cash you out. If your balance is between $1,000 and $5,000, they will usually help you set up an individual retirement account (IRA), which is another tax-advantaged plan you manage yourself.  

If your account has more than $5,000, you will be able to leave your funds where they are. That can be a good choice if you are pleased with the investment options offered, such as unique investment options or low fee compared with the new plan.

Sometimes people opt to leave their funds there temporarily with all the busy-ness associated with starting a new job, so that’s an option if you don’t have time to make an informed comparison of a new plan and/or IRA options and don’t want to make a hasty choice.

There are some drawbacks to leaving your funds in various plans. For example, it can become more challenging to track your retirement savings, and it could potentially complicate matters for your eventual heirs. Also, once you turn 72, you’ll need to start taking a “Required Minimum Distribution” from each of your tax-deferred accounts, which involves an extra accounting puzzle if you have multiple 401(k) plans.

3. Convert your 401(k) into an IRA.

An IRA is another type of tax-advantaged account. There are two kinds of IRAs: a traditional IRA and Roth IRA. With a traditional IRA, you enjoy the same tax benefits as a 401(k) when putting funds in upfront. With a Roth IRA, you’ll take your withdrawals tax-free when you reach retirement age, which can be a benefit if you believe you might be in a higher tax bracket at retirement. Roth IRAs also come with income and deposit restrictions.

IRAs often offer you more freedom and increased investment choices than your previous 401(k) and can be opened at most financial institutions, including Old National Bank.

4.  Liquidate your 401(k).

While this is technically an option since the money is yours, you will owe taxes and a penalty – and could be sacrificing your retirement. Withdrawing funds early inflicts a 10% penalty in addition to the income taxes you’ll owe on the amount. And the earlier you start saving for retirement the more time your money has to grow to keep you comfortable in your golden years. That’s why this option is not recommended.

As with any financial decision, it’s important to make choices based on your own financial situation and goals, keeping your retirement needs at the forefront. Learn more about Old National Bank retirement planning options here.