Figuring Out Retirement When Changing Careers

Figuring out retirement when changing careers is important because a small misstep now can severely impact your retirement options in the future.
Changing careers is becoming more common than it was a few decades ago. People change careers for better pay, better work-life balance, or simply to do something that makes them happy and fulfilled.
Click to learn more about Unmudl and Amazon Original Course Enroll Now in the Unmudl Amazon Original Courses

While it is good to look at how a career change will benefit you in the present, it is also smart to look at how it will impact your retirement. In this guide, we will focus on what a 401(k) or 403(b) is and what are your best options to manage them when changing careers.

Saving for retirement is a common but important financial goal. And if you've worked for a few years at a proper job, you've most likely started to accumulate funds in your pension account(s). It is not only critical to understand what a 401(k) or 403(b) is but also what questions to ask your new employer about their retirement plan when changing careers.

If you're like the majority of Americans, you will probably also change jobs and employers several times during your career in which case another important question arises, what should you do with your old 401(k) when you get a new job?

Every year, American workers lose track of billions of dollars in old retirement savings accounts, so you need to keep track of your account on a regular basis, review your investments as part of your overall portfolio, and keep beneficiaries up to date.

In this guide, we will show you how to keep your retirement goals intact when switching careers and also share what are some good options out there that may be right for you. In addition, This guide will go over four options for effectively managing your workplace retirement accounts and will discuss which path may be best for you and your savings goals.

Download Checklist " 10 Simple Steps to Smooth Job Change"

Figuring out retirement when changing careers

Changing your job or your entire career path can impact your retirement plans in many ways. For today’s discussion, we are going to focus on the one thing that impacts your retirement plans the most, your pension… otherwise known as your 401(k) plan.

What is a 401(k)

A 401(k) plan is a retirement savings plan with tax advantages that is offered by many American employers. It is named after a section of the Internal Revenue Code of the United States (IRC)

401(k) features:

  • A 401(k) plan is a company-sponsored retirement account to which employees can contribute money. Some employers also offer to contribute a percentage of your amount to this account.
  • Traditional and Roth 401(k)s are the two most common types, with the primary difference being how they are taxed.
  • Employee contributions to a traditional 401(k) are pre-tax, meaning they reduce taxable income, but any withdrawals at a point in the future are eventually taxed.
  • Employee contributions to Roth 401(k)s are made with after-tax dollars: there is no tax deduction in the year of contribution, but withdrawals are tax-free.
  • Employers can contribute to both traditional and Roth 401(k) plans.

What is a 403(b)

A 403(b) plan is almost the same except that it is offered by non-profit companies. If you want to understand the differences between the two, here is a great link from Experian that does a great job of explaining it.

Insurance agent and couple wearing face masks while using touchpad in the office
Image by Drazen Zigic on Freepik

How to manage your 401(k) pension plans when you change careers

The important question to ask when changing careers is, “Should I transfer my 401(k) or leave it in the plan of my previous employer?”

By the way, in case you are considering greener pastures, you should go through our ultimate guide to creating a cover letter for a career change and this guide on how to ace your career change interview.

Coming back to the discussion at hand, you have four options when it comes to managing your 401(k) plans. Two of these options come into play if you are planning to either transfer your 401(k) to your new employer or leave it in the plan of your previous employer.

Additionally, you have two more options if you are either considering transferring to an IRA account or if you are planning to cash out. Let’s look at these options as they are important in figuring out retirement when changing careers.

1. Maintain your savings in your previous employer's plan

Although this is the most convenient option, you should still weigh your options. If your previous employer's 401(k) allows you to keep your account and you are satisfied with the plan's investment options, you are free to leave it as is. 

Every year employees changing their jobs or careers lose billions of dollars in old retirement savings accounts. This happens because they do not keep track of their old 401(k) account(s) on a regular basis.

Consider the following if you want to keep your money in your previous employer's plan:

  • The total sum of money in your old 401(k) account
    You may be required to transfer your money out of your former employer's 401(k) plan if you have less than $5,000 in it. If you have less than $1,000 in your account, your former employer will most likely cut you a check for the difference. 

    If this occurs, you must deposit the check into your new employer's 401(k) plan or an IRA within 60 days of receiving it to avoid paying taxes on the money and a 10% early-withdrawal penalty if you are under the age of 59 and a half.
  • Employer stock
    If your account includes publicly traded stock in your former company that has grown significantly in value, the tax breaks you received from in-kind distributions of the stock will be lost if you choose to roll your account over into your new employer's 401(k) plan or into an IRA.
  • Vesting
    If your previous employer makes a matching contribution to your 401(k), the money usually vests over time. If you are not fully vested when you leave your employer, you will only receive a portion of the match or none at all. Talk to your plan administrator to learn about your company's vesting schedule.
  • Fees
    A 401(k) account is a convenient way to save for retirement, but it also has maintenance and transaction fees that can significantly reduce your long-term returns. As you weigh your options, make sure you understand how much you'll be paying in fees.

2. Moving retirement funds from one company to another

When you change jobs, you can also transfer your old 401(k) into your new employer's qualified retirement plan. Lower fees or investment options that better support your financial goals may be available in the new plan. 

Rolling over your old 401(k) into your new company's plan can also make tracking your retirement savings easier because everything is in one place. It's a good idea to speak with a financial advisor who can compare the investments and features of both plans.

Consider the following when considering rolling over a 401(k) into a new employer's plan:

  • Direct rollovers
    A direct 401(k) rollover allows you to transfer funds directly from your old plan to your new employer's 401(k) plan without incurring taxes or penalties. 

    After that, you can work with your new employer's plan administrator to decide how to invest your savings in the new investment options.
  • 401k transfer rules
    Failure to follow the rules for 401(k) transfers may result in additional penalties and taxes. For example, if you do not do a direct rollover and receive funds from your previous employer's plan in the form of a check, you will be subject to a mandatory 20% withholding. 

    Furthermore, if you do not deposit the check within 60 days of receiving it and are under the age of 59 12 months, you will be charged a 10% early-withdrawal penalty in addition to any taxes.
  • Loans
    Some employer-sponsored retirement plans allow you to borrow funds from your 401(k). You may have a larger balance to borrow against if you roll over your old plan into your new plan. 

    You will have to repay the loan with interest over time, and it is usually only available to active employees. You should also be aware of the long-term implications of taking out a loan against your account, so carefully weigh your options and consult with your advisor about the pros and cons.

    Unmudl Tip: By the way, if you're worried about your career change and the uncertainty it brings, check out this great guide on how to afford a career change without struggling.
Download Checklist " 10 Simple Steps to Smooth Job Change"

3. Transfer your old 401(k) to a new IRA (Individual Retirement Account)

Another option is to convert your old 401(k) to an IRA. The primary advantage of an IRA rollover is that you will have access to a broader range of investment options because you will be in charge of your retirement savings rather than being a participant in an employer's plan. 

A rollover can also save you money on management and administrative fees, which can eat into investment returns over time, depending on what you invest in. 
If you decide to roll over an old 401(k) into an IRA, you will have several options, each with its own set of tax consequences. There are three main types of rollovers

  1. Traditional IRA rollover
    When you transfer money from an old 401(k) account to a traditional IRA, no taxes are due, and any new earnings accumulated are tax-deferred. You will only be taxed when you withdraw funds.
  1. Roth conversion
    If you qualify, you can transfer all or a portion of your old 401(k) to a Roth IRA. Make sure you understand all the 401k transfer rules. Converting a traditional 401(k) to a Roth IRA is similar to rolling over a traditional 401(k), with one exception: you must pay taxes on the money you convert. 

    This is due to the fact that Roth retirement accounts are funded with post-tax dollars, whereas traditional 401(k)s are funded with pre-tax dollars. 

    After you convert, any earnings you accumulate will be tax-free as long as your Roth IRA has been open for at least five years and you are at least 59 and a half years old.
  1. Roll over your Roth 401(k) to Roth IRA
    Unlike a traditional 401(k), which is funded before taxes, a Roth 401(k) is funded after taxes. When you transfer money from a Roth 401(k) to a Roth IRA, no taxes are due, and any new earnings accumulate tax-free if certain conditions are met. 

    Earnings are tax-free once the Roth IRA has been open for at least five years and you reach the age of 59 and a half.

Changing careers is never an easy thing. There are so many variables to consider. To help you out we have curated a selection of books and podcasts that will give you an advantage when you are planning on changing your career. You can find links to these invaluable resources below:

Coming back to our discussion on transfers, some other things to consider if you're thinking about rolling over a 401(k) into an IRA:

  • Rollovers are not subject to contribution limits
    Although IRAs typically have a $6,000 annual contribution limit, funds from a 401(k) rollover have no such restriction. Even if you have a substantial amount of money in your 401(k), you can transfer it all to a traditional IRA.
  • Taxes
    \When you do a Roth conversion, the amount that's converted is included as taxable income on your tax return. That means you could end up owing a lot of money to the IRS for your conversion year. 
  • Required minimum distributions
    If you are still working at the age of 72, you must begin taking minimum distributions from your IRA, and the penalty for failing to do so is severe. A Roth IRA, on the other hand, has no required minimum distributions during the account owner's lifetime.

To help you make a more informed decision, we have put together all the benefits and disadvantages for both 401(k) and IRA plans.

benefits and disadvantages for both 401(k) and IRA plans
Comparison Table of benefits and disadvantages for both 401(k) and IRA plans
Enroll Now in the Unmudl Amazon Original CoursesEnroll Now in the Unmudl Amazon Original Courses

4. Cash out your old 401(k)

Is it a good idea to cash out your 401(k) when you change jobs? In an ideal world, it’s a really bad idea. Unfortunately, we live in a less-than-ideal world, so medical emergencies and other undesirable events do happen which might force your hand to withdraw your savings.

It is a bad idea to spend your retirement savings on anything other than retirement. Once that money is gone, it can no longer be used to grow your nest egg. Compounding is a lost opportunity for growth that can never be recovered, and it can be especially damaging for older workers who have little time to replenish their nest egg. 

When cashing out your 401(k) there are implications to consider. 

  • The cash you withdraw is considered income, and you may be subject to local, state, and federal taxes as a result. 
  • You will lose the benefit of allowing your account's investments to grow over time, and you may have to work longer hours to compensate. 
  • Furthermore, if you leave your employer before the year you turn 55 and a half, you must pay a 10% early withdrawal penalty on top of any taxes on the money. 
Photo of person calculating money on a calculator
Image by Drazen Zigic on Freepik

Questions to ask your new employer when changing careers

Now that you have a good understanding of all your options, here are a list of questions you should ask your new employer before you take any decisions that impact your retirement plans:

  • What retirement plans are available, and what are their advantages?
  • Does the employer match employee contributions, and if so, how much?
  • Is there a maximum annual contribution and when can I start contributing?
  • Can I choose my own investment options, and how frequently can I switch them?
  • What are the plan administration or management fees?
  • Is it possible to find statements, tools, and planning resources online?
  • When can I begin withdrawing my funds?

Unmudl Tip: When considering a career change, the most important thing is to arm yourself with any skills that are required in your new line of work. These skills make up for your relative lack of experience in the new industry. Visit Unmudl for a comprehensive collection of short certificate courses across industries to find one that could help you break into that new career.

Final thoughts

Are you leaving your job for better pay or some other better opportunities? While this is an exciting time in your career, don't forget to manage and track your retirement plan(s). Regardless of why you change jobs, you are responsible for protecting your retirement savings.

Changing jobs should ideally result in a higher salary and more opportunities for professional advancement. If that's the case, put a portion of your raise toward improving your standard of living and another toward your retirement savings.

Add some to an emergency fund, which can help you get by during times when you have little or no income. This will help you avoid withdrawing from your retirement savings at a later date.

Other than in the event of the most severe of emergencies it is not a very smart idea to disturb your retirement savings. Cashing out your 401(k) is even worse for younger workers who are decades away from retirement. Spending $5,000 today could cost a worker with 40 years until retirement $80,000 in retirement money (assuming the spent money doubled every eight years).

In this guide, we talked about all your options to manage your 401(k) plan when you change careers. We hope that this guide will help you make an informed decision.

Download Checklist " 10 Simple Steps to Smooth Job Change"

Frequently Asked Questions

When you switch companies what happens to your 401k?

How do you avoid losing your 401k if you change jobs?

Is it better to keep money in 401k or IRA?

Are you on the fence about changing jobs or a complete career change?

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

More Articles