What to Do with Your 401K When You Change Jobs
Changing jobs? What should you do with your 401k? There are 4 options.
1. Leave your 401k alone
If your vested 401k funds total $5,000 or more, your employer is legally required to allow you to leave your funds in the company plan if you choose to do so. This may be a good option for you if you're happy with the performance of your employer's plan. However, many 401k plan administrators charge record keeping and other fees to manage your account. These fees can take a significant bite out of your future net worth, especially if you have accounts maintained at several different employers.
2. Cash it in
This is probably the worst decision you can make. Not only do you have to pay the income tax and 10% penalty for early withdrawal, you are losing a valuable retirement asset.
3. Rollover your 401k to your new employer’s plan
This option is available if you have a concrete job offer before you terminate your current job. In some cases, it may be the best option as it is simple. How do you know if it is the right choice? The decision should largely be made based on the investment options of the new 401k plan. If you are unsatisfied with the choices available to you, completing a 401k rollover to an IRA may be a better option.
4. Rollover your 401k into an IRA
Of all your options, this is probably the best and least cumbersome option if done right. You can go to nearly any bank or financial institution and open a rollover IRA. With a rollover IRA, you can invest your funds in virtually any stock or mutual fund. You should choose a direct rollover and have the distribution sent directly to the financial institution who will manage your IRA. If you decide to have the distribution sent to you, you must contribute it into an IRA within 60 days or it will be considered a withdrawal and you will be subject to the early withdrawal penalty plus income taxes.
1. Leave your 401k alone
If your vested 401k funds total $5,000 or more, your employer is legally required to allow you to leave your funds in the company plan if you choose to do so. This may be a good option for you if you're happy with the performance of your employer's plan. However, many 401k plan administrators charge record keeping and other fees to manage your account. These fees can take a significant bite out of your future net worth, especially if you have accounts maintained at several different employers.
2. Cash it in
This is probably the worst decision you can make. Not only do you have to pay the income tax and 10% penalty for early withdrawal, you are losing a valuable retirement asset.
3. Rollover your 401k to your new employer’s plan
This option is available if you have a concrete job offer before you terminate your current job. In some cases, it may be the best option as it is simple. How do you know if it is the right choice? The decision should largely be made based on the investment options of the new 401k plan. If you are unsatisfied with the choices available to you, completing a 401k rollover to an IRA may be a better option.
4. Rollover your 401k into an IRA
Of all your options, this is probably the best and least cumbersome option if done right. You can go to nearly any bank or financial institution and open a rollover IRA. With a rollover IRA, you can invest your funds in virtually any stock or mutual fund. You should choose a direct rollover and have the distribution sent directly to the financial institution who will manage your IRA. If you decide to have the distribution sent to you, you must contribute it into an IRA within 60 days or it will be considered a withdrawal and you will be subject to the early withdrawal penalty plus income taxes.
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2:56 PM
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