According to the Bureau of Labor Statistics (BLS), the average number of jobs that someone holds in a lifetime is 12.3. The data is based on a BLS survey of baby boomers released in 2019. The survey respondents were born in the years 1957 to 1964, and we would argue that the data would look dramatically different for subsequent generations with the average worker changing jobs much more frequently. The pandemic alone disrupted the U.S. workforce with unemployment climbing to 14.7% in April 2020 due mostly to furloughs and layoffs. In the months since, unemployment has declined to 6% as of March 2021. It still hasn’t returned to its pre-pandemic rate of 4.4%, but pandemic-induced joblessness aside, the days of workers spending their entire career with one company and then retiring with a gold watch and a pension are long gone.
Many workers will collect 401(k) accounts along with new paychecks throughout their careers, and since workplace savings plans can represent a big piece of retirement savings, there are options that should be discussed with an advisor when changing jobs. Essentially, a worker may choose to (A) keep their 401(k) with their former employer, (B) roll the money over into an IRA, (C) roll over their 401(k) into a new employer’s plan, and (D) cash out. If you choose to keep your 401(k) with your former employer — option A, confirm that your employer will allow it and be aware that withdrawal, loan, and plan options may be limited. Furthermore, if your former employer changes their plan, you could face some red tape trying to get access to your funds. If your account balance is less than $5,000, your old employer may require you to move the money and could cash you out if you don’t take action.
Choosing option B and moving the money into an IRA may provide a wider range of investment choices. Individuals who are under the age of 59 ½ may be able to take penalty-free distributions from an IRA for a qualifying first-time home purchase or higher education expenses. Option C — rolling the money into a new employer’s plan — may make it easier to manage retirement savings by having only one account. Advisors recommend checking the investment options available with a new employer’s plan along with the cost and the new plan’s rules. Individuals who choose options B or C should request a direct rollover from their old account to their new IRA, 401(k), or 403(b). The term “rolling” is important because it is a non-taxable event sanctioned by the IRS. Having a check made out to or sent to you could be deemed taking possession of the funds in the eyes of the IRS, which could make it a taxable event. That would cause you to owe taxes on the funds plus a possible early withdrawal penalty, so it’s critical that the funds go directly to your new workplace savings plan and not to you personally.
The last option — option D — should be a last resort. Advisors recommend avoiding cashing out unless you have a critical, immediate need for cash. If you withdraw before age 59 ½, the money will generally be subject to both federal and state taxes and a 10% early withdrawal penalty. If you must access the money and if your former employer allows partial withdrawals, you may want to consider withdrawing only what you need until you can find other sources of cash — or roll the account into an IRA where you could do a partial withdrawal.