A 401(k) is a great perk offered by employers. It’s an easy way to save for retirement, as the money comes directly out of your paycheck and into your retirement. Not having to remember to move the money, not having to second guess whether or not you should save for retirement; it’s fool proof. Many employers (although not all) will offer a match as well, which is free money that they give to you. I’ve seen matches range from 2% on up, with 4-6% being more common. A match may come with vesting requirements, meaning you have to stay with the company for so long before the money is actually yours. I hate to go all caps on this but YOU’RE TURNING AWAY FREE MONEY IF YOU DON’T CONTRIBUTE UP TO THE MATCH. Yup, if you don’t contribute the 2, 4 or 6% or whatever the match is, you’re basically saying “nah, I don’t really like free money”. Sigh. Ok, back to the article, a lot of us young professionals will leave our job sometime in our career, for a relocation, going back to grad school, or getting a better job (more $$$). In fact, a study found that 74% of millennials that like their job plan to leave within 3 years. Wow, imagine the percentage that don’t like their job.

So, there’s a good chance that you’ll leave your job and have to figure out what to do with your 401(k). There are certainly a few options, and I’ll lay them out in order of my personal preferences and explain how they work:

1) Move into an IRA

I personally value more control and more freedom with my money, and that is why I would recommend an IRA. The cool thing is that regardless of whether your money is in a 401(k) or a Roth 401(k), you can roll both into an IRA and keep their tax status. There are more complex options that would let you convert a 401(k) into a Roth, but you’d have to pay a bunch of taxes on it now. A 401(k) typically offers a handful of investment options, maybe a dozen or so. You may like them, or you may not (or you may not know much about them), but having an IRA offers virtually unlimited options. Also, 401(k)’s often times have fees associated with them. Mrs. Money’s 401(k) charges like $50 a year, not a lot but I’m not happy about it and would rather not pay $50 given the choice. Also, I’ve found that a lot of funds in 401(k)’s are pricier. I was able to go from a 0.74% fee on an index fund to a 0.15% when I had more options in my IRA. Why pay more for the same return? I find that moving the money into an individual retirement account (IRA) gives me more options and control over my money.

It’s not that difficult of a process; you’ll find an online brokerage (Vanguard, eTrade, Schwab are all solid) or your bank will offer one (Bank of America has Merrill Edge, which I really like because it’s all accessible through one login). I would recommend trying to get someone on the phone and they’ll walk you through the whole process. One crucial caveat (they’ll tell you but just to remind you) is that when you get the big check from your old 401(k), DON’T deposit it and just mail it right away to the new IRA.

2) Move money into your new 401(k)

The second option is to move the money into your new company’s 401(k). Of course this requires your new company to offer one, but if they do, it’s a relatively easy process as well to move the money over. You don’t get the benefits mentioned in point number 1, but this is just as acceptable as a method of moving your 401(k). Perks of this method mean you get to have your retirement in one place which means less to check/manage/monitor and you’ll have the feel good feeling seeing your balance in total as opposed to in multiple spots. Once again, contact your new 401(k) (likely via contact us on their website) and get the info required to move the money. There’s a good chance your 401(k) is through Fidelity (a ton in the US are), which will make it even easier!

3) Keep it in your old 401(k)

I personally do not recommend this method, I think it’s worth the time and effort (which isn’t huge) to move the money into an IRA or the new 401(k). Offering a 401(k) often comes at a cost to the employer, meaning they’ll pay some back-end setup or maintenance fees so you don’t have to. Once you’re no longer an employee, they don’t have that incentive anymore and you’ll be responsible for those fees. I don’t think the fees are outrageous (I feel like my previous job had it at like $10/month that I would have to pay if I kept my money in the old plan) but still, if you can avoid fees without too much trouble, I definitely advise doing so. Keeping your money there requires basically no action on your part, but you’ll likely start getting hit with a few more fees.

4) Pay taxes + penalty and pay down debt, or buy a house

Probably the least YMF recommended move is to pull the money out of retirement and use it for something in the here and now. As it’s your money, you’re certainly within your rights to pull it out of retirement and spend it now. However, if you do, you’ll pay a 10% penalty and potentially taxes on it (if it’s in a traditional 401(k) account). That could be 10% + 20-30% tax which means you’d only end up with 60-70% of the money you pull out. (Note – the retirement account company won’t pull this money out themselves, you’ll have to be responsible and set that money aside until tax time). Once this penalty (and any taxes are paid), it’s your money! There aren’t many circumstances that I would recommend doing this, even if you’re trying to pay off credit card or other debt, I’d say reduce your future retirement contributions and use that money to pay it down. That penalty is quite steep! There are a few ways you can avoid that penalty – like buying a house or going to grad school. If you do it right and follow the rules (please read up more than just this article, or as your tax professional), you could avoid paying the 10% penalty. However, if you pull out of a traditional 401(k) (pre-tax), you would have to pay taxes on it. There are better ways in my opinion to save for a house or grad school, like opening a 529 plan for yourself, or setting house money aside in the bank. I’d recommend planning ahead and instead of putting that money in a retirement account, just contribute less and put grad school/house money in a separate non-retirement account.

Changing jobs is a part of life for many young professionals and with that will come the decision on what to do with your 401(k) account! Hopefully these thoughts and recommendations help out! Best of luck and good for you for saving for retirement!

Want to learn more? Check out the YMF Guide on “Saving for Retirement”

Saving for Retirement