Retirement Basics
An egg and money in a bird's nest with at $1 bill in the background
Leave 401(k) or roll it over?

If you're like most Americans, you change employers about as often as you change hairstyles.

Indeed, the average worker switches jobs more than 10 times before reaching age 40, according to the U.S. Labor Department.

All that job-hopping may help broaden skill sets, but it also creates a dilemma for those who are unsure what to do with the 401(k) dollars they accrue.

Generally, you have four options when you leave your job:



Four 401(k) options after leaving a job
  • Roll over the funds into an individual retirement account
  • Leave your 401(k) behind
  • Transfer the money to your new employer's plan
  • Take the money and run

That last option really isn't a good choice, lest you sentence yourself to a lifetime of professional servitude. Nonetheless, many people take that route. According to Hewitt Associates, a Chicago-based human resources consulting firm, nearly 45 percent of employees take a cash distribution from their 401(k) plan when they leave their jobs.

Others use a wiser approach. According to Hewitt Associates, 32 percent of people who leave a job keep their 401(k) money where it is, and 23 percent roll over their accounts -- either into an IRA or their new employer's 401(k).

Leaving money in an old 401(k)

Many retirement savers, especially those who are happy with the performance of their 401(k), opt to leave the account balance with their former employer, at least for awhile.

Despite the advice of some experts who favor the flexibility of an IRA (see below), Pam Hess, director of Hewitt Associates, says many employees are better off leaving their money in a defined contribution plan -- either their former 401(k) or their new one.

"Generally, the benefits of leaving your retirement money within a defined contribution plan are superior to rolling them over to an IRA," she says. "You have the purchasing power of the entire plan behind you rather than being out there on your own."

401(k) rules
  • If your account holds less than $1,000, your employer is allowed to automatically cash out your account when you leave.
  • If your account holds between $1,000 and $5,000, most employers will automatically roll your 401(k) into an IRA when you leave your job.
  • If your account holds more than $5,000, you must decide whether to leave your money behind or take it with you.

Indeed, mutual funds affiliated with 401(k) plans typically waive load fees for plan participants and transaction costs for 401(k) investors can be lower. Meanwhile, IRAs frequently charge an annual (though nominal) maintenance fee.


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