The Great Resignation: How to handle your 401k if you leave a job

If the ongoing Great Resignation has influenced you to make a career change and you’re financially prepared for it, that’s terrific – you’re taking a smart approach. That said, don’t forget about your retirement savings.

Workers often leave their 401Ks behind when they leave a job, resulting in roughly $1.35 trillion dollars that’s just floating around in the ether. You’re really going to need that money in the future, folks!

To find out how to best handle the savings you’ve accrued when you leave a job, we chatted with Stephen Molyneaux, founder and CIO of Hanover Advisors. He gave us some excellent tips to keep in mind, so if you’re considering leaving (or simply want to know how to best handle it when you move on in the future), read on.

Don’t abandon your money

Molyneaux told Yahoo Money that he’s “astounded” when new clients come to his company and have left a series of 401Ks behind at past jobs. Luckily, there are many ways to prevent this mistake.

“Make sure when you are leaving a job to take your retirement plan with you or keep up with the one established by your former employer,” he said. “Consolidate them if you have a series of them. You may get better economies of scale under your investments. There are always lots of little pitfalls when you leave these plans behind.”

Learn the difference between 401Ks and IRAs

Keeping your 401K as mentioned above is one option, but there are others, especially for those leaving jobs to open businesses.

“If you have a 401K and move it to an IRA (individual retirement account), you can’t move that IRA to a new 401K unless the new employer allows it,” Molyneaux said. “If [being unemployed] is a long-term situation, it may make more sense to get out of the 401K and into a self-directed IRA. An IRA has more investment options and can be a lot cheaper. You may be able to reduce the fee structure of an IRA as well.”

Understand the benefits of a Roth IRA

Molyneaux said one thing that people should consider if they plan to leave a job is how a Roth IRA can be advantageous to them.

“When you leave a job you have the opportunity to do a Roth conversion,” he says. “You have to pay tax on the gains, but that money grows tax-free. That’s a big advantage.”

Explore penalty-free withdrawal options

If you’re in need of extra money or even considering starting your own business, you may be wondering if you can borrow from your 401K. Molyneaux explains that there are a variety of ways to do this without incurring a withdrawal penalty.

“Penalty-free withdrawals can be used to cover burial expenses, natural disasters, or if you are facing foreclosure,” Molyneaux said. “We have [also] had clients set up a SEPP plan and use that to fund their startup. Another common tactic is what’s known as a rollover business startup (ROBS). It’s a little complex, but basically, you start a new C-corp, issue private shares that are purchased via your existing IRA, then roll that IRA into the new company’s retirement plan.”

In short, you have more options than you may think. Make sure to explore them all before you move on to your next job.