Congratulations! You’ve landed a new opportunity. Now you may be wondering what you should do with the 401(k) account you have with your former employer.
Despite career changes, it’s crucial you stick to your plan for retirement and continue building your nest egg. The first step to making the right decision when it comes to your retirement is to understand your options. Here’s a breakdown of the four most common options to consider when deciding what to do with your 401(k) when you change jobs and the advantages and disadvantages of each option.
1. Keep your funds in your former employer’s 401(k) plan
You may be able to leave your retirement account with your former employer. Generally, if your account balance is at least $5,000, you may be able to leave your account in your former employer’s plan.
One benefit of this option is that you’re already familiar with the plan, the investment options, and the expenses. Although you may have the option to leave your account with your former employer, you will no longer be able to contribute to make deferral contributions.
2. Roll your retirement account into your new employer’s 401(k) plan
Rolling your 401(k) account into a new employer’s 401(k) plan is one of the most common options. The advantage of this option is that it allows you to consolidate your retirement assets, which can lead to faster growth. Consolidating your retirement assets with your new employer allows you to utilize an investment strategy that is easier to track and make changes.
Not all employers allow rollovers into their plan. And if they do, they may require you wait until you become eligible to participate. Even if your new employer does allow you to rollover your account, you may find that you have fewer investment options and resources or that the expense ratios for the investments are higher.
While rolling funds into a new employer’s plan is one of the most common options, it may not be the best option for everyone. It’s important to understand the plan provisions of your new employer’s plan before electing a rollover.
3. Roll your retirement account into an Individual Retirement Account (IRA)
Rolling over funds from your former employer’s 401(k) plan to an IRA is another option. This option is attractive to many because, like rolling over funds to your new employer’s 401(k) plan, rolling over to an IRA keeps your account tax-deferred. This option is especially common among individuals whose new employer may not allow rollovers into their plan or have a service requirement for participation.
IRAs are generally less restrictive and you can choose from a variety of providers and investment options.
Two things to consider with an IRA are the fees and investment options: administration fees and fund fees. Many employers cover a portion of the administrative expenses related to their plan. In an IRA, you will pay the expenses attributable to administration. Employer sponsored plans will also utilize lower cost investment options for the funds offered in the plan. Carefully consider options available and the expense ratios of the funds available in the IRA.
4. Cash out your 401(k)
Although this option may be enticing, cashing out your 401(k) early comes with consequences. A distribution is subject to federal and state income tax withholding, where applicable, and could also be subject to a penalty for early withdrawal if you are under age 59 ½. Taking a cash distribution may negatively impact and reduce the amount you will have for retirement.
How to determine which option is best for you
Knowing the provisions and options of your former employer’s plan and your new employer’s plan regarding 401(k) rollovers will be a factor in your decision. Find out what resources you have and get all the information you can before you make a decision.
To learn more about planning for retirement, check out our other articles about estimating income in retirement, the benefits of saving early, and what your retirement planning goals should look like at each stage of life.