Every year, millions of Americans change jobs. Whether it's for better pay or more growth opportunities, the more frequently workers switch jobs, the greater the chance they will leave behind a 401(k) account. Your 401(k) can play a crucial role in your retirement savings, so when you leave a job, it is important not to forget about your 401(k) account and to know your options.
Every time you change jobs, there are generally four choices for your 401(k) account, and each one has advantages and disadvantages. You have at least 30 days to decide what to do, so let’s review your options so that you can try to avoid any negative impact to your long-term retirement strategy.
1. Leaving assets in your former employer's plan.
If you're happy with your investment options and are comfortable with the fees associated with your current plan, it may make sense for you to keep your 401(k) with a former employer. If you choose this option, it is wise to continue monitoring the account and make sure your contact information is current. It's important to remember that you can move your account to your new employer's 401(k) or an IRA at any time.
2. Rollover the assets into your new employer's plan.
Transferring your assets from the prior employer to your new employer’s 401(k) plan has advantages, such as making it easier to monitor your account's performance since all assets will be in one plan. Life gets busy, and failing to modify your investment strategies on a regular basis to account for your changing needs, can undermine your long-term financial success.
Before you transfer any prior 401(k) plan funds into your new employer plan, review your new employer's plan: to make sure the new plan has the investment options you prefer and the plan fees are reasonable.
3. Rollover the assets into an Individual Retirement Account (IRA).
If you’re interested in rolling your 401(k) assets over to an IRA, you have a few options:
- Roll traditional 401(k) assets into a new or existing traditional IRA. When the money is moved directly to the IRA, no taxes will be due on the assets you move, and any new earnings will accumulate tax-deferred basis.
- Roll Roth 401(k) assets into a new or existing Roth IRA. When the money is moved directly to the IRA, no taxes will be due on the assets you move, and any new earnings accumulate on a tax-deferred basis. Any earnings are eligible for tax-free withdrawal, once the IRA has been open for at least five (5) years and if/when you are at least 59½ years old.
- If a traditional 401(k) plan permits direct rollovers to a Roth IRA, you can roll over assets in your traditional 401(k) to a new or existing Roth IRA. Remember that, because a Roth IRA accepts only after-tax dollars so that the money grows tax free, you will owe taxes on the rollover amount.
4. Liquidate the 401(k) Account Balance.
It may be tempting to cash out your 401(k) account, but such a choice will likely result in penalties and taxes. First, your former employer will withhold 20% of your account balance, as required by the IRS to prepay the taxes owed. And, if you are younger than 59½ years old, then the IRS will likely consider your payout an ‘early distribution’, and impose a 10% early withdrawal penalty in addition to the assessed federal, state, and local taxes. As a result, you could end up paying more than 50% of your account value for an early distribution.
If you're leaving your job, it is important not to forget your existing 401(k) account. If it feels overwhelming, it may be helpful to discuss your situation with an experienced financial professional who can help make sense of the available choices.