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What Happens to Your 401K When You Leave Your Job - Fintorialz

What Happens to Your 401K When You Leave Your Job

Sep 19, 2023

When one is hired as a fulltime employee, they get many benefits that fulltime employees get such as the 401k. The 401k is an account where you can save for retirement. With a 401k account, the employer usually matches the contribution of the employee up to a certain percentage. For instance, if the employee is contributing 5% of their salary towards retirement the employer will give the employee another 5%. There are some details to know about the 401k, such as what happens when you leave your company. But first, this is why you should contribute to your 401k

Reasons to Contribute to 401k

  • Since your 401k is taken from your paycheck before your taxes, it reduces your taxable income
  • You get free money. This occurs when your employer matches your contribution. It is important to know that some companies offer vesting period. This implies that your matched 401k is not yours once you join the company. The contribution from the employer will take time to vest, and this can be from 6 months to 3 years depending on your company rules.
  • You save towards retirement without noticing. Since your 401k leaves your paycheck before your money hits the bank, you never count it as your money. Rather, your brain automatically assumes your paycheck as your net income, as opposed to your gross income.

Sometimes, a company might not be a fit for you. As a result, you might want to leave said company. It is important to know what happens to your 401k when you resign from your job. There are few ways to handle your 401k when you leave your company.

What Happens to Your 401k When you Leave your Job

  • You can roll it into an IRA (Individual Retirement Account). It is advisable for those venturing into the entrepreneurship world.
  • You can cash it out. Although this is an option, it is not advisable since the 401k is a retirement fund. It should not be used till you reach the retirement age. In addition, when you cash out on your 401k before retirement, you pay penalties
  • You can transfer your 401k to your new job. This is a better option if you still plan to work in the corporate world as your money will keep growing for you at your new company
  • You can keep your 401k with your old employer. This isn’t quite recommended as it is better to keep your money safe from an old employer. In addition, it is possible to forget that your 401k still exists with the old employer

As aforementioned, companies have different rules surrounding their 401k. Some companies allow their contribution to vest from the first day. Others make their contributions vest on the third year.  As a result, if you leave your company before your employer contribution of 401k vests, you lose that contribution. For instance, an employee that has $10,000 as contribution and an additional $10,000 as employer contribution loses the second 10k if they leave the company before the vesting period. Since the vesting period is different for each company, it is imperative to study the employee handbook for your company to understand the rule surrounding your contribution.

Many companies enact a longer vesting period so that their employees can stay longer at their company. However, as an employee, you should not feel stuck because your 401k is unvested at your current company. Especially if you are at a toxic organization. You might be able to negotiate that money into your pay when applying for a new job. Many companies pay their new employees sign on bonus at their old companies when they hire them. This depends on how the employee negotiates. The same scenario can be applied to the 401k.




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