10 Things to Know About Your 401(k) Before Quitting Your Job

Don't tender your resignation just yet

Today's workers are leaving their jobs in droves, galvanized in part by the pandemic. The Great Resignation, as it's become known, is driving employees to seek opportunities that better align with their long-term goals and lifestyle. But many probably don't realize the effects this move can have on their 401(k)s.

Sometimes, it is the right decision to move onto something better. But before you make that call, you should know the following 10 things about your 401(k).

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1. If you have an outstanding 401(k) loan

A lot of people withdrew funds from their 401(k) during the pandemic to help them make ends meet. If you were one of them, it's crucial to make sure you don't have an outstanding 401(k) loan when you quit your job.

Your employer can require you to pay the full balance of the loan when you leave the company. If you're not able to do so, the outstanding balance is considered a distribution. You'll pay taxes on it if it's from a traditional 401(k), plus a 10% early withdrawal penalty if you're under 59 1/2. That could create a lot of financial headaches for you, so it's always good to double-check your loan status with your company's HR department before you hand in your resignation letter.

ALSO READ: Are You Making the Most of Your 401(k)?

2. How your company's matching system works

Understanding how your current employer's 401(k) matching system works is crucial for two reasons. First it can serve as a basis for comparison when you're looking at new job opportunities. You can use this to weigh whether or not it's worth jumping ship for a new company.

It's also important to know because your match plays a major role in how much you have to contribute personally to keep yourself on track for your retirement goals. If your new match is worth less than your old match, you may have to contribute more going forward to retire when you originally planned. Conversely, if your new match is worth more, you might be able to contribute less money today or retire earlier than you originally planned.

3. What your company's vesting schedule is

A vesting schedule determines when your employer-matched funds are yours to keep. If you quit before you're fully vested, you could lose some or all of your employer match. This isn't something you have to worry about if you've been with the company for six or more years. But if you've been there for a shorter time, the vesting schedule could come back to bite you.

Some companies use a graded vesting schedule, where your employer releases the matched funds to you a little at a time, while others have a cliff vesting schedule, where you only get to keep your matched funds if you work for the company a certain number of years. If you're close to being fully vested, consider sticking it out at your current job a little longer so you don't lose what you already have.

4. How much you're contributing

If it's been a long time since you decided how much of each paycheck you'd like to contribute to your 401(k), now's a good time to double-check this. You'll want this information ready when you switch jobs so you can determine how much to contribute to your new retirement account.

Now is also a good time to reevaluate how much you're contributing to your 401(k) to decide if you need to increase it. If your new job has a higher salary, you should ideally set aside more for retirement to keep yourself on track.

ALSO READ: 5 Ways to Squeeze Every Penny Out of Your 401(k)

5. What you can do with your old 401(k) funds

You usually have a few options when it comes to managing your old 401(k) funds. You can leave it where it is, though it may get difficult to manage multiple accounts. If your current job allows it, you can roll the money into your new 401(k). Or you could roll it into an IRA. You can also cash out your retirement savings, though this is usually a bad idea because you'll pay taxes on it, plus a 10% early withdrawal penalty if you're under 59 1/2.

It's up to you to decide which strategy makes the most sense for you. You don't have to move your money immediately. You could always do so in a year or two if you decide you'd like to manage your funds in one place. But it might be easier to move your money right away if you're going to do so.

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6. What your balance is

What you can do with your old 401(k) funds after you leave your job depends in part on how much you have in the account. If you have less than $1,000 in your account, your employer can force you off the plan by cutting you a check for your balance. If you have more than $1,000 but less than $5,000 in your account, they can move your money into an IRA if they want.

When you have $5,000 or more, your employer can't just throw you off the plan. But you may still decide you want to leave if you don't like your investments, you feel you're paying too much in fees, or you prefer to manage your money in one place.

7. What you're paying in fees

Understanding your 401(k) fees might help you make the call on whether you want to leave your old 401(k) funds alone or move the money to an IRA. Ideally, you don't want to pay more than 1% of your assets every year. Some 401(k)s charge expensive administrative fees or only offer costly investment options for employees to choose from.

If either of these is the case for you, you're probably better off transferring your money to an IRA. Those have a much larger array of investment options to choose from, and it's much easier to find investments that have low fees.

ALSO READ: Here's Why 40% of 401(k) Savers Could Lose Out on Lots of Money

8. How the government taxes your 401(k) funds

If you're thinking about rolling your old 401(k) funds over into an IRA or another 401(k), you need to know whether your old account is tax-deferred or Roth. Tax-deferred account contributions reduce your taxable income this year, but you pay taxes on your distributions later. Roth account contributions don't give you a break this year, but you get tax-free withdrawals in retirement.

You need to make sure the account you're transferring your old 401(k) funds to is taxed the same way. Most 401(k)s are tax-deferred, so these funds would have to go in a traditional IRA.

But Roth 401(k)s are becoming more popular. If you have funds in one of these, you can roll it over to a Roth IRA.

9. When you or your employer cashed out the account

There are two ways to do a 401(k) rollover: direct and indirect. A direct rollover is where you tell your old plan administrator where you want the funds sent. Then, it does the transfer without you ever touching the money yourself. Indirect rollovers are where your old plan administrator cuts you a check. If you fail to deposit that money in your new account within 60 days, it's considered a distribution and could be subject to taxes and penalties.

If you choose to do an indirect rollover or your employer cuts you a check to get you off its 401(k) plan, make sure you pay attention to when the account was cashed out. Get the money into your new account before the 60 days are up to avoid any problems.

10. If you can take penalty-free withdrawals

Those in their 50s may decide to just retire rather than find a new job. While there's typically a penalty for withdrawing 401(k) funds under 59 1/2, there are some exceptions. One of them is called the Rule of 55. This states that anyone who parts ways with their employer in the year they will turn 55 (or 50 if you work in public service) may take penalty-free withdrawals from the retirement account they had with their most recent employer.

That doesn't give you free rein to use the money in your other retirement accounts, though. And it's not always a good idea. Just because you can take the withdrawals without penalty doesn't mean you can afford to fund a few extra years of retirement. If you're worried about your financial security, it's best to leave your 401(k) funds alone for a while.

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A job change affects more than your salary

Switching jobs can be a great move in some cases. If it allows you to save more money than you had been or earn a 401(k) match, it could improve your retirement readiness dramatically. But there's more to think about than salary and benefits when considering whether it's a smart move for you.

Make sure you understand the 10 things described here and have a plan for how you'll handle your old 401(k) funds going forward. This will help you avoid costly mistakes and give you a better idea of how to make the most out of your new retirement plan.

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