Can I Contribute to my 401(k) After I Quit?

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Can you contribute to your 401(k) after you quit or leave your job? The short answer is "no." A 401(k) is designed to make it easier for employers to help their employees save for retirement, and if you are no longer an employee, your former employer has no need to do so.

However, when you leave a job, you have several options for the money you've accumulated in your 401(k), and it's important to consider all of them to come up with the best plan for you.

Option 1: Leave it aloneEven though you can no longer contribute to your former employer's plan, you may be able to leave the money that's already been contributed in the plan. If you have more than $5,000 in your account, the plan's administrator is required to give you the option to leave your account there. Some other plans have a lower threshold or none at all, so check with your plan administrator if this is an option you may be interest in.

There are some good reasons to consider leaving your 401(k) where it is. Just to name a few:

  • 401(k) investment funds can have lower fees than mutual funds that ordinary investors can buy (known as institutional mutual funds).
  • If you don't want the homework involved with researching individual stocks, bonds, and funds, or simply don't trust yourself to make good investment choices, a 401(k) is a headache-free way to invest.
  • With a 401(k), you may have access to professional financial planning advice for free.

Option 2: Roll it over to your new employer's planIf your new employer offers a retirement plan, you'll probably have the option to roll over your old 401(k) balance to the new plan. If it's available to you, this can be a good option, as it lets you keep all of your employer-sponsored retirement savings in one place.

The only potential downside to this is that many plans' funds charge significantly different fees for essentially the same investment options. Over time, this can have a big impact, so be sure to compare the costs before deciding to roll over your account. If the investment fees of your former employer's plan are lower, you may be better off leaving your money there.

Option 3: Roll it into a traditional IRAIf you want to have a greater level of control over your retirement savings, rolling over your account into a traditional IRA may be the best move for you. Once your 401(k) balance is transferred to an IRA, you'll be able to invest in virtually any stocks, bonds, or mutual funds you want not just the funds offered by your 401(k).

And, you'll be able to continue to make contributions to the account. As of the 2016 tax year, you can contribute up to $5,500 to a traditional IRA plus an extra $1,000 if you're over 50. Your contributions may be tax-deductible, depending on your income and whether you and your spouse have the opportunity to participate in a plan at work.

Option 4: Cash it outThis is by far the worst option on the list. We wouldn't go so far as to say there is never a good reason to cash out a 401(k) after leaving a job, but it's true in most circumstances.

If you're under 55, the age at which you can cash out a former employer's 401(k) without penalty, you'll get hit with a 10% early withdrawal penalty. Plus, the withdrawal will be considered taxable income. Just to illustrate this, if you're in the 25% tax bracket, withdrawing a $10,000 401(k) balance will leave you with just $6,500, and that's not including any state or local taxes.

This should be reason enough not to cash out, but the real issue is that an early 401(k) cash-out is effectively stabbing your retirement in the back. If you're 35 years old, a $10,000 balance in a former employer's 401(k) could balloon to more than $150,000 by the time you turn 65, based on the stock market's historical performance.

Cashing out your 401(k) in this case could mean the difference between having $6,500 now or more than $150,000 later. Don't do it.

What should you do? It depends...Aside from cashing out, the other three are all valid options, and the right choice depends on you. If you want to be able to invest your money in any stocks, bonds, or mutual funds you want, an IRA is probably the way to go. On the other hand, if you'd rather have more of a passive role in your retirement investing (nothing wrong with this), one of the 401(k) options may be best.

The point is that there are several directions you can go with your 401(k) after you leave your job. And, as long as you keep the money invested, you'll be a long-term winner.

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