What Happens to 401(K) When You Leave Your Job
So getting now into Paulette's question about rollovers, first, how much do you get to take with you? You always get to take your contributions to a retirement plan. We're really switching back here to people that are traditionally employed, might get an employer-matched 401(k) offering, a 403B. Don't stress, the money you put into your 401(k) you always get to walk out the door with. That's your money. Now, you may not be able to walk away with all of your employer's contributions, cause sometimes there are some fun catches. It's known as something called a vesting schedule. There are three different types. It is immediate, graded, and cliff. So this determines how much of your employer's contributions you get to walk away with. Immediate means if you walk out the door three months after starting, and you already signed up immediately for a 401(k) and they put money in, you get to walk out the door with it. It doesn't matter when you leave, you always get to walk away with yours and y...
our employer contributions, it vests immediately. This is obviously the creme de la creme of vesting options which means it's pretty rare. Next is graded. So what happens is each year, a percentage of your employer contributions vest. So in year one, it might be zero. So if you left after the first year, you only get to take your money, not the money that your employer put in. Year two, perhaps it's 20%, year three it's 40, so on and so forth. Usually it takes five or six years before you are 100% vested. Of course they are using this as a way to try to keep you at the company. That's another perk that they're using or incentive to get you to stick around. So in real terms, if you had $7,000 worth of employer contributions in addition to the money that you put in, and you walked away after, let's say, year four, you would only walk away with 60%, or $4,200, plus your contributions. And cliff is the worst. Cliff is you have to wait until the very end when it fully vests around usually year four or five. So if you walk away in years one through three, or one through four, that's it, you're not taking any of your employer contributions with you. So what happens when you do walk out the door? What can you do with your 401(k)? You could leave it there, perhaps. Oftentimes, there is some sort of asset minimum, so unless you've had at least $5,000 accrued in there, you have to take it with you, roll it over, do something else with it. Be sure to check out the fees of the plan, if it's a high-fee plan, definitely take it with you when you walk out the door by rolling it over. Gonna get into what that means in a moment. But remember, you can't keep contributing to this plan after you leave your employer and your employer is not going to keep contributing either, which is another reason it makes sense for you to take it. Because do you wanna have multiple 401(k)s at a bunch of different companies? This wasn't a targeted shot, I promise. (laughter) The simplest thing is to roll it over and there's two different ways you can do this. If you're going to a new company with a 401(k) plan, it's possible to roll it into your new employer's 401(k), depends, some employers allow it, some don't, but that is one option. Another is to just roll it over into an IRA for yourself, something that you can be controlling. So maybe you have a new company 401(k) and an IRA. But how do you roll it over? First, you have to decide which brokerage you wanna use. Now this is assuming, of course, that you're not rolling it over into a new employer's account, it's for you into an IRA. Examples of brokerages include things like Fidelity, Vanguard, Charles Schwab, Betterment being a robo-advisor, other robo-advisors often do IRAs now as well. You open your rollover IRA. Typically you login and immediately see the option for a rollover, trust me they want your money, they make this very simple for you. And then you have to contact your old employer's 401(k) plan administrator. So that actually might be one of these guys. Sometimes your company used Fidelity or Vanguard anyway, so it makes it really easy. You just call 'em up and say "Hey, I wanna roll this our into an IRA." Easy peasy, sometimes you have to call them up and have them send a check to the new guys in order to roll it over and then you select your investments again, Target Date Fund if you don't know what else to do, otherwise building our portfolio however you'd like. A big thing here is don't be afraid to get on the phone. The first time I had to roll one over, I did find it a bit overwhelming so I just called, they will walk you right through that. Again, they want your money, they're gonna make this nice and easy for you, they wanna get those little investment fees from ya, so they'll make it nice and easy for you to be able to roll it over. And just talking to someone, especially with stuff like this, just really can calm you down as well. Please do not cash out your 401(k). Cashing out means you don't roll it over, it means you take the money right here and now, and if you're under 59 1/2, and you ever pull money out of your retirement accounts, they're not only going to hit you with the tax bill, they're gonna charge you a 10% penalty. There are a couple of caveats here, perhaps buying a house, sometimes education, but frankly I don't really like talking about them cause I don't ever like to encourage people to cash out their retirement accounts. Just please always roll it over because getting hit with a tax bill and the 10% penalty can mean that you're basically nullifying whatever you were gonna think that you walked out the door with. Now before I get into this final idea of really, quirky ways to motivate yourself to save, does anyone else have a final question about either rolling it over or fees or investment accounts, anything else?
So, I know that I have several places like Paulette that I've worked, and I don't even know, one of them sends me stuff in the mail, so like I can call them, but for other places, I don't even get anything in the mail from them anymore even like, when I worked for the state. So do you have any suggestions on where you can go to find out like where all your IRAs or all your 401(k)s I guess are?
I think that's a million dollar idea to create some sort of website where you can plug your name and maybe your last four digits of social and it pulls it up, I'm not aware of such a website existing, but I would just proactively reach out to any former employers if you think there could be money there that you might have left. Just get in touch with the HR Department and see and ask and they might refer you to a plan administrator such as a Vanguard, Fidelity, Charles Schwab, and at that point you can probably just share a name and social and I would think they'd be able to pull that up for you.