What to do with your 401(k) and HSA after you’ve left a job

My absolute favorite way to create content for you, dear readers, is by answering your real live questions. If we aren’t connected on socials or personally yet, you can always write to hi@fortunamoney.com. I will happily answer you, and—with your permission and appropriate levels of anonymity, as applicable—I may also share it here. Y’all are smart cookies. If you want to know a thing, chances are that other people do too! This week’s post comes from just such an inquiry. 

Hey Fortuna: What do you do with employer-sponsored retirement accounts like a 401(k) if you leave your job or decide to be your own boss?

I am so glad you asked. Let me say up front: if this stresses you out, I feel your pain. For me, this was right up there in my head next to “changing my last name when I got married” as a fearsome logistical task that I wanted nothing to do with. Fortunately for all of us, safely rolling over funds from employer-sponsored accounts is way, way easier than pulling off a name change.

When you leave an employer, the money you put in an employer-sponsored retirement account is YOUR money. You get to keep it, and leaving your employer gives you an opportunity to move it someplace that’s more convenient (and ideally offers you better investment options). 

  • An important exception here to the “you get to keep it” rule: some employers create a “vesting” requirement that requires you to stay at your job for a certain amount of time before the employer contribution portion of your retirement is legally yours. This is essential knowledge even if you don’t want to leave your job right now. You might not have noticed the fine print when you first signed on, but if you have an employer-sponsored retirement account, you should find out. 
  • Health Savings Accounts (HSAs) aren’t technically retirement accounts, but the process for rolling over an HSA is very similar to rolling over a retirement account. All the money is yours, including any employer contributions. You can continue to spend it tax-free on qualified health care expenses even if your new health insurance isn’t HSA-compatible. 

The tl;dr to-do list 

  1. Choose the type of rollover account you want to keep the funds in. You can move it to your 401(k) at your new employer, but if you can’t or don’t want to, open an account at an investment company that you like. (We use Fidelity and their rollover process is painless.)
    We recommend putting a traditional 401(k) into a traditional IRA (not a Roth IRA). A Roth 401(k) must go into a Roth IRA, and an HSA will move to another HSA.
  2. Contact your old employer-sponsored retirement provider and request a DIRECT ROLLOVER sent straight to your new 401(k) or new rollover account.  
  3. After the money lands, don’t just leave it in cash: make sure you allocate it to low-fee, high-performing index funds. 

If you’d like to know the “why,” keep reading!

Why can’t I just take the money out myself, or leave it where it is? 

Retirement accounts are special. There are a few different kinds, and the rules are generally set up by the government to incentivize people (and their employers) to create secure long-term financial futures, largely born out of times when the opposite happened.

If you aren’t saving for retirement yet, you should think about it (our tips on getting started here). Traditional pension arrangements are increasingly rare, social security doesn’t come close to covering long-term living expenses, and even if you’re lucky enough to have one (or both) of those, you can still benefit from a retirement account.   

The rules around retirement accounts vary, but they boil down to giving people (and employers) tax breaks to make choices that support saving for on-time retirement, with guardrails to prevent these breaks from being abused (and while allowing the tax man to eventually get his). What this means in practice is that you want to be careful while handling these accounts so you don’t inadvertently trigger taxation or penalties. Most of the time, this is not hard to do. You just leave the money in the account. Withdrawing it in cash before age 59 ½ means that you pay 10% in penalties plus whatever your tax burden is. In some cases, this can be up to 40%. We do not want this!

But if you leave your job, I don’t recommend leaving your retirement account where it is. In most cases, you can, but there are a few reasons not to. One financial reason not to is that many employer-sponsored accounts have more limited fund options than you can find on the open market. If you choose your own investment company, you can prioritize the kind of investing that you want to do. There are also some employer-sponsored plans that charge higher fees to left-behind (i.e., non-employee) accounts. 

The human reason not to is that, because I am a scatterbrained little goldfish, I don’t personally like having money squirreled away at numerous financial institutions.

It’s much easier to track my net worth and to notice weird discrepancies if I keep everything where I can see it. It’s incredibly common for people to leave their employer-sponsored account where it is, and then remember five or ten years later that they need to try and track that account down. Sure, it’s a nice surprise to find money that I’d forgotten about, but that pales in comparison to the much higher likelihood that I’d forget it entirely until it was way too late. (Not to mention the hassle of trying to actually track down a long-lost account.) 

You can roll your old 401(k) into your new employer’s 401(k), and that’s not necessarily bad; once upon a time, I thought that was the only option. However, depending on the 401(k) providers involved, there’s probably some extra friction. 

My preferred alternative—now that I know how easy it is—is to roll the account over into a “rollover IRA.” 

How exactly do I do that?

First, you open a rollover account at an investment company that you like. If you don’t know who to use, we currently use Fidelity (not sponsored, but we like them and they made this process in particular really easy). If you’re not an existing customer, you’ll have to create a profile so they can do their customer due diligence and make sure you’re not three goblin sharks in a trenchcoat trying to launder some money. (Please, someone draw this for me.)

If you have an investment firm that you already want to use, Google their name + “rollover IRA” for specific instructions. I just checked the top 5 largest investment companies in the world, and for all of them, this returns results telling you where to start. It’s new to you, but it’s not new to any investment bank worth their hand-harvested French finishing salt.  

If you don’t already have a rollover IRA with your investment firm of choice, you’ll need to open one; if you do, you can use the same rollover account to collect funds from multiple employer-sponsored retirement accounts. We recommend matching the rollover account type to the original investment account; otherwise, you may find yourself dealing with tax complications.

  • For regular (non-Roth) 401(k)s, you fund them with pre-tax dollars, but you pay taxes on the withdrawal at retirement. For traditional IRAs, you can get a tax deduction when you make your contributions, and then you pay taxes on the withdrawals at retirement. Since these are both “taxed at the finish line” accounts, they’re treated the same. If you’re moving a traditional 401(k), you can put it in a rollover Roth IRA, but we don’t recommend this because you will have to pay big taxes up front now.
  • Roth 401(k)s became an option in 2006. You fund them with after-tax dollars, and withdrawals are tax-free on retirement. (Employer matches and earnings on the employer contributions are taxed at retirement, though.) If you’re moving a Roth 401(k), you can only put it in a Roth IRA, because both are “taxed at the starting line.” 

The next part is simple and easy, like playing Simon Says. But also like playing Simon Says, the magic words matter. In this case, the magic words are “DIRECT ROLLOVER.” 

Why? 

I’m a bit of a plant lady, so we’re using plant metaphors. In this case, money = plants, because when both are placed in the right conditions, they grow with hardly any work on your part. 

Retirement money is like a delicate plant that has to stay in a special pot until it matures. You can’t plant it in your garden before it’s ready (in this case, when you retire), or else it will be eaten by tax-and-penalty slugs. But you can transfer it from one special pot to another without any problems. 

What you can’t do is take it out of the pot, and put it in your garden, and then put it back in a special pot. (If you do that, the tax-and-penalty slugs will get your sweet baby plant.) This is where “direct rollover” comes in, and I like it because it’s the hardest option to mess up. 

  • There is another option in which you withdraw the money to yourself and deposit it to your new account within 60 days. As someone who regularly struggles with remembering to cancel a free trial membership before the deadline, I DO NOT RECOMMEND THIS. Taxes and penalties can eat up to 40% of your money if you screw this up, which is way, way worse than having to pay $9.99 for another month of DashPass. Hypothetically
Not actually hypothetical. #facepalm

When you open your new account and indicate that you want to roll over an employer-sponsored retirement plan, the financial institution for your new account will provide you with the information you need to give to your employer plan provider.  

When you contact your employer plan provider, make sure you tell them you want to do a direct rollover, and provide them with the new account info. When the employer plan providers cut the check to close your account, they won’t write it to you – they’ll write it to your new IRA and send it directly there. The money just goes from one special pot to the next, and you never even touch it. 

So putting your 401(k) into an IRA doesn’t count against your other contributions?

It does not! Contribution limits do not apply to rollovers, so you can still contribute money to your IRA up to your annual contribution limit. However, because we like keeping things simple, I don’t recommend putting regular contributions into the rollover IRA; it can present challenges if you choose to move the money again. I’d personally just open another account. 

Speaking of employer-sponsored plans… I also have an HSA. What do I do with THAT when I leave? 

HSAs (Health Savings Accounts) are wild, y’all. Forbes calls them “one of the most powerful savings accounts allowed by the federal government.” To have an HSA, you need to use a High Deductible Health Plan (HDHP) as your health insurance. HDHPs are tricky, but as a gateway to getting your foot in the HSA door, they come in handy. An HSA is triple-tax-favored: you get tax advantages on the money you put in, tax-free growth, and tax-free withdrawals for qualified medical expenses.

If you leave your job, you get to keep every penny in there—even the employer contributions—and you can continue to spend it on qualified healthcare expenses. You can also just leave the money in there and let it keep growing, because HSAs can be invested in the market. Unspent HSA dollars are kind of like bonus retirement funds: at age 65, there’s no penalty to use it for whatever you want. You just pay taxes at the finish line, as if it were a 401(k) or traditional IRA, on anything that’s not a qualified healthcare expense. 

That being said: if you leave your plan or your employer, you should shop around to see if you can find a new HSA provider that offers you better investment options or convenience. You will especially want to do this if your employer’s HSA provider charges higher fees to non-employee accounts. It might also be easier to manage your HSA if you keep it at the same place as your other investment accounts.

Using more or less the same process we describe above for retirement accounts, you open a rollover HSA and execute a direct rollover of the funds from your old HSA. 

You keep mentioning “better investment options.” What do you mean?

A critical step of this process is making sure you put all that sweet, sweet cash back into smart investment vehicles. In our getting-started guide on our simple, straightforward approach to saving for retirement, we share the process we use for picking index and mutual funds with long track records of strong performance and very low fees. Once you learn how to rack-and-stack the index funds you’re interested in, you might realize that an open-market investment company offers you way better returns than the options that your old 401(k) or HSA provider has—it’s a big reason why many people want to move their 401(k)s after they leave.

In our guide, we also offer our thoughts on where you should be in your financial journey before you start saving for retirement. If you’d like recommendations on how to kickstart our approach for yourself, please reach out and book a Big Financial Picture session!

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