Options for Your ‘Orphan 401K’ When You Leave Your Job

Options for Your ‘Orphan 401K’: If You Were Part of the Great Resignation After COVID-19, Stay Ahead of Retirement Planning

The Great Resignation has had a ripple effect in the working world—higher turnover, shifting career paths, and for many, so-called “orphan 401(k)” accounts. It can be hard to know what to do with your employer-sponsored 401(k) savings account when you leave a company, but don’t worry—leaving your job doesn’t mean you have to leave money on the table.

There are several different paths you can take, each with its own advantages and disadvantages depending on your personal circumstances. However, the one thing you want to avoid doing is nothing at all. If you leave your old retirement account to sit and gather dust, you could be abandoning a lot of opportunity – and money along with it. Check out these potential options for handling your orphan 401(k) and find out which one is right for you.

Impacts of the Great Resignation

First, if you’re not familiar with the term ‘Great Resignation,’ it refers to the significant number of American workers who quit their jobs beginning in Spring 2021. It happened as vaccinations lessened the severity of the COVID-19 pandemic, amid strong labor demand and low unemployment. Some workers left the workforce altogether, while many others with pent-up frustrations in their current roles chose this time to finally leave and seek new employment. One result was a great many 401(k) plans left behind.

If you have a 401(k) left at an old job, here are your options:

‘Orphan 401K’ Option 1. Consider Cashing Out

Sometimes, there’s nothing quite like cash. You have the option of cashing out your old 401(k) and getting a lump sum in return, which may be a particularly attractive option if the pandemic has taken a financial toll—but keep in mind that it will come at a cost. First, you’ll pay income tax on the full distribution amount. There’s also a 10% withdrawal penalty if you’re younger than 59 1/2 . Because of these factors, you may want to consider leaving some of your funds in the account so your money can continue to grow.

‘Orphan 401K’ Option 2. Keep Your Account with Your Former Employer

If you’ve left your position, but you aren’t quite ready to leave your former employer’s investment options, you can choose to leave your old 401(k) where it is. First, you’ll have to check with your employer to find out whether this is permitted. If it is, this can be a very easy way forward. Of course, “easy” isn’t the same things as “smart” so here are some things you’ll want to consider:

  • If your account balance falls below $1,000, your former employer could cash you out of their plan.
  • If your account balance falls below $5,000, it’s within their rights to automatically move your account to a rollover IRA, unless you alert them that you have other plans.
  • Perhaps most importantly: you can no longer contribute to your former employer’s 401(k) plan, but you will have to keep up with maintenance and updates.

Often, this can be an attractive option if you have a substantial amount of money in your account, which can allow you to avoid some of the above considerations. Make sure you take a close look at the plan portfolio and ensure that you’re comfortable with the plan’s specifics. You can always choose to stick with your former employer’s 401(k) until you familiarize yourself with your new employer’s options, though this probably should not be your long-term plan.

‘Orphan 401K’ Option 3. Current Employer Direct Rollover

If your new employer offers a great 401(k) plan, it’s a savvy move to take advantage of their offerings. A direct rollover into your current employer-sponsored account can bring with it some big benefits—including avoiding both taxes and penalties. It’s also a solid way to increase your account balance quickly by boosting investable dollars.

Keep in mind that not all employers allow rollovers, so make sure you do your research. If it is an option for you, there is usually some paperwork involved, but it should be straightforward. You can work with your new employer’s plan administrator to select how you’d like to allocate your savings and maximize your new investment options.

‘Orphan 401K’ Option 4. Rollover Your 401(k) to an IRA

Just like you have the choice to roll your account over to a new employer-sponsored option, you can also choose to roll your orphan 401(k) directly into an Individual Retirement Account (IRA) and avoid both taxes and penalties. Rolling your money into an IRA can also potentially reduce management and administrative fees, which can cut into your returns over time. IRAs aren’t completely fee-free, but you have a lot of options and control that can help you reduce costs.

By design, IRAs offer almost unlimited investment options. If your new employer’s 401(k) offering is limited, an IRA can give you more types of investments to choose from, like individual stocks, bonds, and ETFs, to name only a few. Many 401(k) plans limit the number of times you can rebalance your portfolio per year, but IRAs allow you to buy and sell your holdings any time you want.

Give Your Orphan 401(k) a Home

Changing jobs is a significant life transition, especially during a cultural movement like The Great Resignation. It can be difficult to know how to proceed to protect your retirement and make the best financial move. Make sure to do your research to evaluate potential tax implications and any fees you could incur. And, make sure to remember the bigger picture. Your decision depends entirely on your needs, your situation, and your overall retirement goals.

Would you like professional guidance on your retirement planning? We can help! At Paces Ferry, we provide clients with experience and vision, and we are committed to being there for our clients through every phase of their lives – career transitions included. If you’d like to learn more about our services, please reach out today. We look forward to hearing from you!

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”).  This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.