Morgan Stanley
  • Wealth Management
  • Feb 28, 2023

Understanding Your Retirement Plan Options When You Leave a Job

You have several choices for what to do with your qualified retirement plan when you leave a job. Deciding among them is an important step in managing your retirement savings over time.

One of the hardest parts of retirement planning is getting started. If you opened and saved through a 401(k) plan at a former employer, you should pat yourself on the back for making a smart decision, even if you are no longer at that job or are planning to leave soon. But you may also be unsure about what to do with your 401(k) after leaving your job.

Manage your Wealth

Find a Financial Advisor, Branch and Private Wealth Advisor near you

When you change employers, regulations make it easy for you to keep investing those savings tax-deferred, as long as you don’t simply cash out. In addition to losing out on the considerable benefit of tax-deferred growth potential on pre-tax earnings, cashing out can trigger hefty penalties. Generally, if you withdraw money from your 401(k) account before age 59 1/2, must pay a 10% early withdrawal penalty, in addition to income tax, on the distribution. 

You generally have three other options for handling your 401(k) when you leave your job: You can leave the funds in your former employer’s plan (if permitted), roll over the funds to your new employer’s plan (if one is available and if rollovers are permitted), or roll them over into an investment firm’s Individual Retirement Account. 

Below are a few key points to consider to help determine the appropriate choice for you:

  • If your new employer offers a 401(k) plan that matches part of your contributions, you may want to consider rolling over the assets from your old plan into your new one. Rolling over your 401(k) to a new employer helps you avoid retirement plan sprawl. If you don’t consolidate plans at each job, you may end up with a half dozen separate retirement accounts over the course of your career, making it hard to tell if your savings are on track. 
  • You may want to compare plan fees and investment options before you make this decision. To compare fees, check the plan’s annual report and individual fund documents. You can usually find this information online through the 401(k) provider’s website.
  • If you aren’t moving to a new job with an appealing 401(k) plan, you may want to consider opening an IRA and rolling your 401(k) savings into that. You can choose to open an IRA with a firm that both offers the kind of investment options you are looking for and that may give you access to advice. While many 401(k) plans offer some resources to participants, this is generally not a strong suit. You may appreciate the greater support for investment decisions and holistic wealth management that you may be able to access through an individual retirement account. 
  • There are other factors based on your personal situation that you may want to consider before making this decision.  Each option offers advantages and disadvantages, depending on your particular facts and circumstances (including your financial needs, your goals and objectives). Some of the factors you should consider when making a rollover decision include (among other things) the differences in: (1) investment options, (2) fees and expenses, (3) services, (4) penalty tax-free withdrawals, (5) creditor protection in bankruptcy and from legal judgments, (6) Required Minimum Distributions, or “RMDs,” (7) the tax treatment of employer stock, and (8) the availability of plan loans (e.g., loans are not permitted from IRAs, and the availability from an employer’s qualified retirement plan will depend on the terms of the plan). The decision of which option to select is a complicated one and must take into consideration your total financial picture. To reach an informed decision, you should also discuss your 401(k) options with your financial or tax advisor.

Rolling over your 401(k), whether into an IRA or your new company plan, may take a bit of administrative work, but it isn’t difficult to do. In both cases, you reach out to the new plan provider or the investment firm you plan to work with and let them know you will be rolling over assets from an old plan. Then, contact the old 401(k) plan provider to initiate the process of making a qualified distribution into a new qualified account. Your former 401(k) plan provider may send you a check made out to the new custodian, with your name on it to ensure that it goes into the right account.

Ready to Start a Conversation?

Find a Financial Advisor Near You.

Filter by investment need, ZIP code or view all Financial Advisors.

Check the background of Our Firm and Investment Professionals on FINRA's Broker/Check.