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What To Do With Your 401(k) When You Change Jobs

Changing jobs is considered a stressful life event. There are so many things to consider because it greatly affects your day-to-day life. One thing that often gets overlooked is the 401(k). And since very few companies offer 401(k) plans, it’s not always top-of-mind.

So, what do you do with your 401(k) when you change jobs? Here are four options:

  1. Rollover to your new employer’s plan
  2. Open an Individual Retirement Account (IRA)
  3. Leave the account where it is
  4. Cash-out your 401(k)

Rolling over an existing plan to your new employer’s plan is always the best option, as long as it meets your investment criteria. It is important to evaluate the costs you may face when opening a new retirement plan. In some cases, employers have the option to negotiate lower overall fees for their plans than individuals can for their IRAs.

Although most IRAs provide plenty of investment opportunities, with options come extra fees to assist in the managing of your account. It may be in your best interest to make use of your new employer’s plan if they present strong investments. If you are changing from an employer’s plan with a limited or no-charge advisor to an IRA where you have to hire an advisor, you may be giving up too much. 

Leaving the account where it is doesn’t mean that you are doing nothing with your money. Rather you are weighing out your options. One of the best reasons to leave your account with your previous employer is you are taking advantage of a low/no cost to manage your account. Do your diligence before leaving your account with your previous employer. Left alone, and you may end up losing. 

Cashing out your account is probably considered the worst option, and there are only rare cases when this should be done. Here’s why: Taking money from your 401(k) can ruin your retirement plans, because of tax burdens. Right off the top, there is a 10% penalty if you take a distribution and are under the age of 59 ½. Depending on your tax bracket, you may be responsible for additional taxes. You’ll want to visit with your financial advisor before cashing out a 401(k). 

Your first problem is the federal and state income tax you will receive when you cash it out. You will also receive a 10% penalty if you are under the age of 59 ½. Besides the fees, when you cash out your investment you may be compelled to spend it on a vacation before you start your new job. Reinvesting or keeping the money where it is will be a much safer bet. 

In short, before you make any drastic decisions it is important to understand what your retirement plan fees, investment opportunities, and benefits are. From there you can manage your assets and make sure they are reaching their full potential.