5 Options for Your 401(k) When You're Leaving Your Job
September 22, 2020
By Rahul Iyer
One of the most important decisions that you must make when moving from one place of employment to another is what to do with your 401(k). There are quite a few things that you can do, but before you make a decision, analyze the 5 options that we will share in this article.
Leave the Funds in Your Former Employer’s Plan
Many companies permit their former employees to leave their funds in their 401(k) plan. If your 401(k) balance is less than $5,000, your former employer may request that you take the funds. Some companies will allow you to leave your funds in their 401(k) plan if your balance exceeds $1,000.
Having the opportunity to leave your money in your previous employer’s 401(k) plan gives you more time to plan your next move. While you decide what to do next your money will continue to earn interest.
Rollover Your 401(k) To Your Next Employer’s Retirement Plan
When moving to a new post in a new company, a simple option is to move the funds over to their retirement plan. The work of monitoring multiple plans can be challenging and tedious. If you do not know what you are doing, you may end up off track with your retirement saving goals and not be aware.
When you roll over your 401(k) you will not face any taxes. Having all your retirement savings in one place makes the work of tracking your progress much simpler. By keeping all or much of your retirement funds in the retirement plan of your current place of employment, you may be able to delay the required minimum distributions until you pass 70 ½ years old.
Move Your Retirement Savings to a Traditional IRA
This may be a better idea than leaving your funds in your former employer’s 401(k) plan or rolling your funds over into your new employer’s 401(k) plan. This is so because IRAs provide many benefits that you will not access with a 401(k). With an IRA you will get access to a wider variety of investments.
Move Your Retirement Savings to a Roth IRA
The money that you are permitted to contribute to a Roth IRA faces taxes before getting to the account. This option is a little more appropriate for individuals who know that they will be in a higher tax bracket at the point of retirement. With a Roth IRA, you will not pay tax on your retirement disbursements.
Withdraw All Your Funds
You have the option of cashing out your 401(k) plan completely. While this option gives you immediate access to cash, you will also have to face taxes and the early withdrawal penalty if you are under 59 ½. If you cash out your 401(k) you will no longer have the benefit of your money growing tax-free.
It is important that you diligently assess the options that are available to you when moving from one job to another. Do not be complacent when it comes to your retirement balance. We recommend that you consult with a professional financial advisor to ensure that you make a decision that is in line with your retirement goals.