If you currently have a 401(k) plan through your employer, you’ll need to decide what to do with it when you leave your job. You will likely have multiple options, including leaving it where it is, rolling your balance over to your new employer’s plan, or rolling it over into an Individual Retirement Account, also known as an IRA. There is also the option to cash out your old account, but that will come with major tax implications if you’re under the age of 59 and a half. Before touching your current 401(k) plan, it’s crucial to compare your options so you can make the best choice for your specific retirement goals.
Let’s take a closer look at each option:
- Keep your existing 401(k) plan. Depending on how much money you currently have in your 401(k), you may be able to simply leave it where it is. If your balance is at least $7,000 you cannot be forced to cash out your 401(k) balance or move your funds to another account. However, if your balance is less than $7,000 it will be up to your former employer whether to allow you to continue using their plan. One thing to keep in mind is that if you leave your money in an old employer’s 401(k) plan, you will no longer be able to contribute funds to it. Nor will your old employer be making contributions on your behalf. Rather, your existing money will continue to be invested, and you will typically still be able to work with your plan’s provider to change those investments as needed. Keeping your funds in your old 401(k) account could be a good option if you are pleased with the plan’s performance and don’t mind juggling multiple accounts (because you’ll likely still want to establish another retirement account that you can contribute to). Just be aware that you may incur additional plan fees once you are no longer an employee, and whatever you do, don’t forget about your old account!
- Roll your balance over into your new employer’s 401(k) plan. If your new employer offers a 401(k) plan, you should strongly consider opting into it. One major benefit of taking advantage of an employer-sponsored 401(k) plan is that your employer will typically match your contributions (either partially, or in full), helping your retirement savings to grow at a faster rate. If you decide to use your employer’s 401(k) plan, you can roll the money from your old 401(k) into your new plan. Simply contact your old plan’s provider and let them know that you’d like to roll over your account balance. In some cases, you can provide them with your new account details, and they can electronically transfer the funds. If that is not an option, your old provider can issue a check made out to your new plan provider and you can forward it to them. Another option is for your old plan provider to make the check out to you, but it’s important to be aware that in this scenario the old provider will retain 20% of the funds for tax withholding purposes. This is called an “indirect rollover” and your employer will withhold 20% of the distribution since they can’t be certain you will actually deposit the funds into your new retirement account and not just cash the check yourself. In order to get that 20% back as a refund when you file your taxes, you must deposit the check into your new 401(k) account, along with the amount that was withheld, within 60 days.
- Roll Your Balance Over Into an IRA. If your new employer doesn’t offer a 401(k) plan, or if you are very dissatisfied with their plan, you could open an Individual Retirement Account, commonly referred to as an IRA. Rather than being offered through your employer, an IRA is set up through a financial institution. The process for rolling over the funds from your old 401(k) plan will be the same as if you were rolling the funds into an employer-sponsored plan. Your old plan provider can electronically transfer the funds to the new account, make out a check to your IRA provider, or issue you an indirect rollover by making out the check to you (just remember the implications of an indirect rollover). One benefit of rolling your money over into an IRA is that you won’t have to worry about any more rollovers if you change jobs again down the road, since they are not tied to your employer. IRAs also typically offer more investment options than a 401(k) account. An obvious downside to an IRA is that there is no employer-match.
- Cash out your 401(k) account. If you are under the age of 59 and a half, you should seriously reconsider cashing out your 401(k) account. The reason is that dipping into those funds early will cost you. In addition to having to pay taxes on the withdrawn amount (something you’ll have to do no matter what your age), you will have to pay a 10% penalty if you make a 401(k) withdrawal prior to the age of 59 and a half. So, unless you are in desperate need of money, cashing out your 401(k) early is not a financially-sound option.
No matter what you decide to do with your existing 401(k) plan, keep in mind that it’s always a wise choice to consult with a tax professional before making any major changes to your investment strategy or retirement plans. If after considering your options you are interested in moving your 401(k) funds to an IRA, don’t hesitate to contact our retirement planning team today.