When you leave your job, you maintain control over the funds that you have contributed to your employer-sponsored 401(k) plan. These are referred to as employee-contributions.

Some companies offer employer contributions and they can come in various forms, but these employer contributions may not become available until you meet the eligibility criteria. Employer vesting schedules can take many forms, but typically require that you reach a certain tenure to gain 100% ownership of the employer contributions made to your 401(k). Once you have met these employer criteria, you become “vested” in these funds and gain ownership over the contributions. If you leave the company before you meet their vesting criteria, you may forfeit those employer contributions.

Now that we better understand how leaving your employer can impact the overall valuation of your 401(k), what happens to your 401(k) when you switch jobs? Depending on your savings goals and your new employer, there are a few options available to you. Before you rush into a hasty decision, ask your company’s plan administrator how quickly you need to make a decision. In some cases, you’ll have up to 60 days to decide how to move forward.

Take the money as a lump sum.

The money you contribute to your 401(k) account belongs to you, so it’s within your rights to cash out when you leave your current employer. In fact, you may be able to withdraw money from the account even before you leave.

Withdrawing your money when you switch jobs can be enticing as it may provide you with a quick influx of cash to pay for large expenses. However, doing so can significantly reduce your retirement savings and should not be taken lightly. In addition to greatly impacting your long-term retirement goals, the amount you receive from your 401(k) will be considerably less than the account balance, as an early withdrawal penalty will be assessed (if you’re younger than 59 ½), and it will trigger income tax on the amount you withdraw.

Remember that money placed in your 401(k) account by you or your employer is tax-deferred. Withdrawing money early can trigger state and federal income tax, as well as a 10 percent premature distribution penalty tax. Washington residents are not subject to state income tax, but federal rates can still take a substantial bite out of the funds you receive. Likewise, if the income from your 401(k) withdrawal places you in a higher tax bracket, you could end up paying even more. Drawing upon your 401(k) during retirement as originally intended can help you better control your tax liability and avoid undesirable fees.

Take qualified distributions.

If you are age 59 ½ or older, you may take qualified distributions from any 401(k) account you possess, regardless of when the account was opened. This can be a great source of income if you are no longer working. Designated Roth accounts allow you to take tax-free distributions if you have possessed the account for more than five years. Otherwise, only the earnings portion of your funds is taxable. If you retire between ages 55 and 59 ½, you can take distributions from your 401(k) account without incurring the 10 percent penalty.

Once you reach age 70 ½, you are required to take distributions if you are retired. Required minimum distributions are calculated by your plan administrator, using your expected life span and account balance.

Leave the money with your previous employer.

If your account balance is over a certain dollar amount, you may have the ability to leave your money in your previous employer’s 401(k) plan. Many plans have a minimum balance that you must maintain to qualify for this benefit, generally $5,000. Once you reach the retirement age of your former employer’s plan, you may be required to withdraw the funds.

Leaving your funds with your old employer can be a good idea for several reasons, including:

• Your previous employer’s plan may have low fees
• Your new employer offers a 401(k) plan, but may not allow you to contribute right away
• You want to take your time in deciding how best to proceed with your retirement funds

There can be downsides to leaving your money with your previous employer. For example, if you enroll in another 401(k) at a new company, you’ll have to manage two accounts. If your previous employer makes significant changes to their plan—such as switching plan providers, updating fund selections, assessing participant fees, etc.—you’ll have to re-learn how to find and access your money.

Roll your funds into your new employer’s plan.

If your new employer offers a 401(k) plan with low fees and acceptable investment options, you can move your funds directly into the new account. Doing so is simple, and usually requires you to fill out forms with your previous plan’s administrator. In most cases, the administrator will deposit the funds into your new account. You also have the option to request a check for the lump sum. In this case, you must deposit the money into the new account within 60 days, or risk incurring income tax and penalty fees.

A direct rollover can be a good option if you are happy with your new employer’s plan and you want to consolidate your funds for easier management. If you think you might forget about the old account or you’re worried about your previous employer’s financial future, moving the funds can give you peace of mind. Be sure to ask about all of the services that come with your new plan to determine which option is best for you.

Move your money into an IRA.

You can elect to move your funds from a 401(k) account to an individual retirement account, such as a Traditional IRA. If you elect to move these funds, it can give you the freedom and flexibility to place your funds where you believe they can grow the most. For example, if you aren’t thrilled with the investment options offered by your new employer, you can place your money in an IRA with a myriad of investment and savings alternatives.

When you choose this route, you can select a low-cost IRA with the ability to allocate your funds to your desired mix of stocks, bonds and mutual funds, money markets, or even real estate. Additionally, you can designate anyone you want as the beneficiary of your account. With a 401(k) plan, you must name your spouse as the beneficiary, or receive a signed release from him or her to name someone else. An IRA may also give your retirement savings greater accessibility, should a need arise. A 401(k) can be restrictive in how and when you can access your funds within the plan, but IRAs are fully controlled by you.

If you choose this option, it’s a best practice to set up the IRA account in advance and then request that your plan administrator directly move the funds for you. This ensures that no penalties or taxes are assessed for the rollover.

A Financial Advisor can help you evaluate your investments and retirement strategy. If you’re changing jobs or just want to learn more about how to reach your goals, find a tailored solution with help from OnPoint Community Credit Union.