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Changing jobs is a major life event, and with it comes a critical question: What happens to your 401k? Many people are unsure about their options when they leave a job, and making the wrong decision can have a significant impact on your retirement savings. In this guide, we’ll explain the different options available to you—whether you should roll over your 401k, leave it with your old employer, or cash it out—and the pros and cons of each choice.
1. Rolling Over Your 401k to a New Employer's Plan
One of the most common options when changing jobs is rolling over your 401k from your old employer’s plan to your new employer’s plan. This option allows you to maintain your retirement savings in a tax-deferred account without taking a distribution.
Pros:
Consolidation of Retirement Accounts: Keeping your retirement savings in one place can make it easier to manage your investments and monitor your progress.
Tax-Deferred Growth: Your funds continue to grow tax-deferred, and you don’t face penalties or taxes for rolling it over into a new plan.
Potential for Better Investment Options: Some employers offer 401k plans with lower fees or better investment choices, which could benefit you in the long run.
Cons:
Limited Investment Choices: Some employer plans may have fewer investment options compared to an IRA, so you might be restricted in your asset allocation.
Eligibility Requirements: Some employers have a waiting period before you can contribute to their 401k plan or roll over your previous 401k funds, which could delay your options.
How to Do It:
Contact your new employer’s HR department or 401k plan administrator for instructions on how to initiate the rollover.
You’ll typically need to provide details of your old 401k plan, and they may assist you with the process.
2. Leaving Your 401k with Your Old Employer
If you prefer not to deal with moving your 401k to your new job or an IRA, you may choose to leave your 401k with your previous employer. Many companies allow former employees to keep their 401k in the existing plan, especially if you have a substantial balance.
Pros:
No Immediate Action Required: If you’re not ready to make a decision, leaving your 401k with your old employer gives you time to weigh your options.
Retain Plan Features: If you’re satisfied with your old 401k plan’s investment options, fees, and services, this could be an easy choice.
Protection from Early Withdrawal Penalties: Leaving the money in the 401k protects you from early withdrawal penalties, as long as you don’t take a distribution before age 59½.
Cons:
Limited Control and Access: After you leave the company, you may not be able to make additional contributions or have the same access to plan resources as active employees.
Plan Fees: Your old employer’s plan may have higher fees or fewer investment options, which could limit your potential for growth.
Difficult to Manage: As your career progresses, keeping track of old 401k accounts with multiple employers can become cumbersome, especially if you change jobs several times.
How to Do It:
Contact your old employer’s HR department or plan administrator to confirm your balance and ask about their policy for maintaining your 401k with them.
If your balance is under $5,000, the company may force a rollover or cash-out, depending on the plan's rules.
3. Cashing Out Your 401k: What You Need to Know
Another option is to cash out your 401k, where you take the full balance as a lump sum. While this may seem like a tempting option, it’s important to consider the long-term financial implications.
Pros:
Immediate Access to Funds: If you need the money for an urgent expense, cashing out gives you immediate access to your 401k balance.
No Rollover Hassle: It’s a simple process with no need to coordinate between different retirement accounts.
Cons:
Taxes and Penalties: Cashing out a 401k before the age of 59½ typically results in a 10% early withdrawal penalty, in addition to regular income taxes on the distribution.
Loss of Retirement Savings: By cashing out, you lose the opportunity for your retirement savings to grow tax-deferred, which can significantly impact your long-term financial goals.
Potential for Regret: While it may seem like an easy choice now, cashing out can lead to regret later, especially when you realize the funds you could have accumulated by leaving the money in your 401k.
How to Do It:
To cash out, you’ll need to request a distribution from your former employer’s 401k plan administrator.
Expect to receive a check or have the amount directly deposited, minus any required taxes and penalties.
4. Rollover to an IRA: The Best of Both Worlds?
Instead of rolling over your 401k to a new employer’s plan, you can choose to roll it over into an Individual Retirement Account (IRA). IRAs offer more flexibility and potentially lower fees, making this a popular option.
Pros:
More Investment Options: IRAs typically offer a broader range of investment choices than 401k plans, giving you more control over your portfolio.
Lower Fees: Many IRAs have lower fees compared to 401k plans, which can result in higher returns over time.
Flexibility: You can choose a traditional IRA (tax-deferred) or a Roth IRA (tax-free growth) based on your tax situation and goals.
Cons:
No Loan Option: Unlike 401k plans, IRAs do not offer loans against the balance, so you lose this flexibility.
Rollover Process: While straightforward, rolling over a 401k to an IRA requires some paperwork and time, and you need to be careful to avoid tax penalties by completing the process correctly.
How to Do It:
Open an IRA account with a bank, brokerage, or financial institution of your choice.
Once your IRA is set up, request a direct rollover from your 401k plan administrator to your new IRA.
Conclusion:
When changing jobs, what you do with your 401k can have a significant impact on your retirement savings and future financial security. Whether you decide to roll it over to your new employer’s plan, leave it with your old employer, or cash it out, each option has its pros and cons. The best choice depends on your personal financial situation, retirement goals, and the specific rules of your employer’s plan.
Before making a decision, consider speaking with a financial advisor to ensure you choose the option that aligns with your long-term retirement plan. Remember, making the right decision now can lead to greater financial stability in the future.
Not sure what to do with your 401k after changing jobs? Contact us today to discuss your options and make the best choice for your retirement savings.
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