Feb. 19, 2025

Can New Job Offers Derail Your 401k?

Changing Jobs? Don’t Derail Your 401(k) – Here’s How to Get It Right

Congratulations on the new job! It’s an exciting time filled with new opportunities and possibilities. But amidst all the excitement, don’t forget about your hard-earned retirement savings. A job change can be a critical moment for your 401(k), and making the right decisions now can have a significant impact on your long-term financial well-being. Can New Job Offers Derail Your 401k?

Check out the full podcast episode:

As Christians, we are called to be wise stewards of the resources God has entrusted to us, and that includes our finances. Proverbs 21:5 reminds us, “The plans of the diligent lead surely to advantage, but everyone who is hasty comes surely to poverty.” ¹ So let’s approach this decision with prayerful consideration and diligence.

What to Do with Your 401(k) After Changing Jobs

When you leave a job, you have several options for your 401(k):

Leave it with your previous employer: If your former employer allows it and you’re happy with the plan’s investment options, you can leave your 401(k) where it is². This might be the easiest choice, but it’s important to weigh the pros and cons carefully. You may not be able to make new contributions to the plan, and there may be limited investment options or higher fees³.
Transfer to your new employer’s plan: This allows you to consolidate your retirement savings and take advantage of any benefits offered by your new employer’s plan⁴. However, not all employers allow rollovers, and some plans may have waiting periods or restrictions⁵.
Roll over to an IRA: This gives you more control over your investments and a wider range of investment options². You can choose between a traditional IRA or a Roth IRA, each with different tax implications.
Cash out: This is generally the least desirable option, as it can result in taxes and penalties⁴. If you’re under 59 ½, you’ll typically face a 10% early withdrawal penalty and owe income tax on the distribution⁶. There are some exceptions to the 10% penalty, such as hardship distributions, which are allowed under certain circumstances like unreimbursed medical expenses that exceed a certain percentage of your adjusted gross income⁷.

Important Notes:

If your 401(k) balance is less than $1,000, your former employer may be required to cash out your account and send you a check².
For small 401(k) balances, your former employer may automatically roll over your funds into a default IRA⁸.

Tax Implications of 401(k) Rollover Options

Rollover Type	Tax Implications
Traditional 401(k) to Traditional IRA	This rollover is tax-free, and your money will continue to grow tax-deferred. You’ll only pay taxes when you withdraw the money in retirement⁷.
Traditional 401(k) to Roth IRA	You’ll have to pay taxes on the amount you roll over in the year of the conversion, but qualified withdrawals in retirement will be tax-free⁹.
Roth 401(k) to Roth IRA	This rollover is tax-free, and qualified withdrawals in retirement will also be tax-free¹⁰.
Cash Out	You’ll owe income tax on the distribution, and if you’re under 59 ½, you’ll likely face a 10% early withdrawal penalty, unless an exception applies⁷.

Important Notes:

If your 401(k) includes employer stock, there may be special tax considerations. For example, under the net unrealized appreciation (NUA) rules, you may be able to roll over employer stock to a brokerage account and pay taxes at more favorable long-term capital gains rates when the shares are sold¹¹.
Direct rollovers involve transferring funds directly from your old plan to the new plan without you ever touching the money. Indirect rollovers involve receiving a check for your 401(k) balance, which you then deposit into the new account⁸. With an indirect rollover, your former employer is required to withhold 20% of the distribution for taxes¹².
You have 60 days from the date you receive an indirect rollover distribution to deposit it into a new retirement account. If you miss this deadline, the distribution will be considered a taxable withdrawal, and you may be subject to penalties¹².

Investment Options for 401(k) Rollovers

IRAs typically offer a wider range of investment options than 401(k)s¹⁴. This can give you more flexibility to create an investment strategy that aligns with your risk tolerance, time horizon, and financial goals¹⁵. Here are some of the investment options you might find in an IRA:

Stocks: You can invest in individual company stocks or in stock mutual funds, which pool money from many investors to invest in a diversified portfolio of stocks. For example, you could invest in a low-cost S&P 500 index fund, which tracks the performance of 500 large U.S. companies¹⁷.
Bonds: You can invest in individual bonds issued by corporations or governments, or in bond mutual funds. Bond funds offer diversification and professional management¹⁷.
Mutual Funds: These funds pool money from many investors to invest in a variety of assets, such as stocks, bonds, or real estate. There are many different types of mutual funds, with varying investment objectives and risk profiles¹⁴. For example, you could invest in a target-date fund, which automatically adjusts its asset allocation as you get closer to retirement¹⁸.
ETFs: Exchange-traded funds are similar to mutual funds, but they trade on an exchange like stocks. ETFs can offer diversification, low costs, and tax efficiency¹⁴.
Alternative Investments: Some IRAs allow you to invest in alternative assets, such as real estate, private equity, or commodities¹⁵. These investments can offer diversification and the potential for higher returns, but they may also come with higher risks.

Special Considerations: 401(k) Loans

If you have an outstanding 401(k) loan when you change jobs, you’ll need to understand the implications⁸. Some employers require you to repay the loan in full within a short timeframe after leaving the company. If you can’t repay the loan, it may be considered a taxable distribution, and you may be subject to early withdrawal penalties.

Leaving Your 401(k) with Your Previous Employer

While leaving your 401(k) with your previous employer might seem like the easiest option, there are some potential drawbacks to consider:

Limited Investment Options: You’ll be limited to the investment options offered by your former employer’s plan, which may not be the best fit for your needs¹⁹. For example, your old plan may not offer access to certain asset classes, such as gold or emerging markets funds¹⁹.
Higher Fees: Your former employer may charge higher fees for managing your account now that you’re no longer an employee³.
Loss of Control: Your former employer has control over the plan rules and can make changes that may not be in your best interest²⁰. For example, they could change the plan’s investment options, add restrictions on withdrawals, or increase fees.

Rolling Over Your 401(k) to a New Employer’s Plan

Rolling over your 401(k) to your new employer’s plan can be a good option if:

You like the investment options and fees: Make sure to compare the investment options and fees of your new employer’s plan with those of your old plan and an IRA²¹.
You want to consolidate your accounts: Consolidating your retirement accounts can make it easier to manage your savings and track your overall investment strategy²².
You want to take advantage of the “Rule of 55”: This rule allows you to take penalty-free withdrawals from your 401(k) if you leave your job in or after the year you turn 55²¹. This rule only applies to your current employer’s plan, not to funds rolled over from previous employers²¹.

However, there are also some potential risks to consider:

Limited Investment Options: Your new employer’s plan may not offer the same investment choices as your old plan or an IRA²¹.
Higher Fees: Your new employer’s plan may have higher fees than your old plan or an IRA²¹.
Loss of Control: Your new employer has control over the plan rules and can make changes that may not be in your best interest²¹.

Rolling Over Your 401(k) to an IRA

Rolling over your 401(k) to an IRA can offer several benefits:

More Investment Choices: IRAs typically offer a wider range of investment options than 401(k)s²⁴. This gives you more flexibility to tailor your investments to your specific needs and risk tolerance.
More Control: You have more control over your investments and can choose how your money is invested²⁴.
Lower Fees: You may be able to find an IRA with lower fees than your old 401(k) or your new employer’s plan²⁵. Fees and expenses can significantly impact your long-term returns, so it’s important to choose an IRA with low costs².
Roth Conversion Option: You can convert a traditional 401(k) to a Roth IRA, which can provide tax-free withdrawals in retirement²⁴. However, you will have to pay taxes on the amount you convert in the year of the conversion.

However, there are also some potential drawbacks:

Less Creditor Protection: IRAs generally offer less creditor protection than 401(k)s²⁶. While IRAs are protected in bankruptcy, they may not be protected from other types of creditor judgments, depending on state law⁵.
No Loan Options: You can’t borrow money from an IRA²⁷.
Required Minimum Distributions: Traditional IRAs require you to start taking required minimum distributions (RMDs) at age 73 (or age 75 for those born in 1960 or later)²⁸. Roth IRAs do not have RMDs.

Biblical Wisdom for Job Transitions and Financial Decisions

As you navigate this job transition and make decisions about your 401(k), remember to seek God’s wisdom and apply these Christian principles:

Stewardship: We are called to be wise stewards of the resources God has given us¹. This means managing our finances responsibly and with integrity. Colossians 3:23-24 reminds us, “Whatever you do, work at it with all your heart, as working for the Lord, not for human masters, since you know that you will receive an inheritance from the Lord as a reward. It is the Lord Christ you are serving.” ²
Contentment: 1 Timothy 6:6 reminds us that “godliness with contentment is great gain.” ²⁹ Don’t let the pursuit of wealth consume you. Find satisfaction in your work and in God’s provision.
Generosity: We are called to be generous with our resources and to use them to bless others³⁰. Proverbs 22:9 says, “The generous will themselves be blessed, for they share their food with the poor.” ³¹
Trust in God: Proverbs 3:5-6 encourages us to “Trust in the Lord with all your heart and lean not on your own understanding; in all your ways submit to him, and he will make your paths straight.” ¹ When facing career decisions or financial challenges, seek God’s guidance through prayer. James 1:5 says, “If any of you lacks wisdom, you should ask God, who gives generously to all without finding fault, and it will be given to you.” ³²

Conclusion

Changing jobs is a significant life event, and it’s important to make wise decisions about your 401(k) that align with your financial goals and your faith. Take the time to carefully consider your options, seek professional advice if needed, and pray for God’s guidance. By being diligent and responsible, you can ensure that your retirement savings stay on track and continue to grow, providing for your future and allowing you to be a blessing to others.

Key Takeaways

Don't make hasty decisions about your 401(k) when you change jobs.
Carefully weigh the pros and cons of each option, considering factors such as investment options, fees, and tax implications.
Seek professional financial advice, especially when dealing with complex situations or if you need help creating an investment strategy²⁴.
Remember to pray and seek God's guidance in all your financial decisions.

By addressing your 401(k) rollover options with diligence and prayer, you can honor God with your finances and ensure a secure financial future.

Works cited

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Ralph V. Estep, Jr.

Christian Financial Consulting

Ralph V. Estep, Jr. is a highly accomplished professional with a diverse background in finance, accounting, technology, and entrepreneurship. As the principal at Saggio Management Group, Inc., he has demonstrated exceptional leadership and expertise in various roles throughout his career.

Ralph's educational journey began at St. Mark's High School in Newark, Delaware before attending the University of Nebraska where he was an esteemed member of the Cornhusker Marching Band and had the privilege of performing at the Florida Citrus Bowl in Orlando.

Continuing his pursuit of knowledge and excellence, Ralph earned a Bachelor of Science Degree in Accounting from the University of Delaware. He further expanded his academic achievements by obtaining a Master's in Business Administration from Wilmington University.

Throughout his professional journey, Ralph has been recognized for his outstanding accomplishments and commitment to excellence. He is a member of prestigious organizations such as the Golden Key National Honor Society and Beta Gamma Sigma International Business Honor Society.

With an extensive range of professional designations including Licensed Public Accountant (LPA), Accredited Business Accountant (ABA), Accredited Tax Advisor (ATA), Accredited Tax Preparer (ATP), and Internal Revenue Service Registered Tax Preparer (RTRP), Ralph possesses comprehensive expertise in tax preparation and financial management.

Beyond his impressive qualifications, Ralph has actively engaged with various community programs as bo… Read More

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