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Four 401(k) Options When You Leave a Company  Thumbnail

Four 401(k) Options When You Leave a Company

A new job is exciting. But the transition usually entails some financial decisions that need to be made, one of them being what you should do with your old 401(k) plan.

401(k) plans are a great way to allow retirement savings to grow tax deferred while working, but what happens when it’s time to say goodbye to your current employer? When you leave a job, you typically have four options. You may have the possibility of leaving it in the former employer’s plan. You may want to move to a new employer’s 401(k) plan, or roll it over to an IRA. Cashing out is another option but this typically results in significant tax consequences. You should explore all your options so you can determine which move is right for you.

Leave the money in your former employers 401(k)

Most companies will allow former employees to continue to invest in their 401(k) plan so long as there is at least $5,000 in the account.  There are a few reasons leaving money with a previous employer makes sense. If you’ve saved a significant amount in that account, or the company offers an expansive choice of investment options and low fees, you may want to consider keeping the money as is. However, leaving the investments in your prior employer’s plans will require you to be responsible for selecting a proper asset allocation and picking from numerous investment options.  If you have a smaller amount saved, or the fees are not super appealing, you may want to consider other options. Keep in mind that once you leave, you’ll no longer be able to contribute to it.

You may also want to take into consideration how frequently you’ll change jobs throughout your career. According to a January 2018 report from the Bureau of Labor Statistics, the average person will change jobs anywhere between 10 and 15 times throughout the course of their career. [1]If you leave behind your 401(k) with every previous employer, you’ll have a handful of accounts to manage come the time of retirement. This could make it more difficult to calculate total savings, and you may potentially find yourself overpaying for unnecessary investments.  

Roll it over to your new employer’s 401(k)

If the new job you are transitioning to offers a 401(k) plan and accepts rollovers, you might want to move the money over into the new employer’s plan. This is a good option so long as the fees are reasonable and there are a broad selection of investment choices. The main advantage to this is that all your money will be in a single account, making it easier to manage. But perhaps you’re not impressed with the company’s fees or investment options. That brings us to the third option.

Roll it over into an IRA

Your third options is to roll over your 401(k) into a self directed IRA or Roth IRA. Traditional IRA’s have numerous advantages. Investments in the account grow tax-free, and any withdrawals made in Retirement are taxed as ordinary income. IRA’s also allow more flexibility when choosing your investments. You can choose to invest in stocks, bonds, mutual funds, or real estate investment trusts. A financial professional can help you create a well-diversified investment portfolio that will help reach your long-term financial goals.

 Rolling your previous 401(k) plan into an IRA is a good option if your new employer doesn’t offer a 401(k) plan, or they do offer a plan but you’re not impressed with the fees and investment options. You might also want to consider an IRA if you’re someone who tends to change jobs more frequently, or you anticipate you’ll change jobs frequently as you continue climbing your career ladder. An IRA will provide you one single place to invest the money from your prior retirement accounts, making for easier overall management of your retirement funds. There’s no cap as to how much 401(k) funds can be rolled over into the Roth.

Cash out Completely

Your fourth option is to cash out your 401(k), which is referred to as a lump-sum distribution. If there’s one option you want to avoid, it’s this one. If you take a distribution before the age of  59 ½, you’ll be required to pay federal income taxes, as well as possible state and local tax. In addition to this, the distribution may be subject to a 10% early withdrawal penalty.   

When it’s time to part ways with your job, it’s important that you consider each option carefully. If you’re uncertain about which 401(k) move is right for you, a financial professional can help you make a decision based on your personal financial situation and investment preferences.

[1] https://www.bls.gov/nls/questions-and-answers.htm

Investment adviser representative and registered representative of, and securities and investment advisory services offered through Voya Financial Advisors, Inc. (member SIPC). 

Archstone Financial is not a subsidiary of nor controlled by Voya Financial Advisors.