Is a job or career change on the horizon? Thinking through all the choices and decisions you need to make can be confusing. If you’ve been regularly adding to a 401(k) plan at your current employer, what to do with it is one of the decisions you’ll need to make. We’ve put together a quick primer that breaks down your choices.
What to Do with Your 401(k) When Changing Jobs?
There are typically 4 options for managing a 401(k) when you switch to a new employer. You can:
That’s right. If you have over $5,000 in your 401(k), then you might be allowed to leave the money with your former employer. Ask your former employer about the minimum balance that needs to be in your plan for you to avail this option. In most cases, if you have less than $5,000 invested in your plan, then your employer might ask you to withdraw the money by issuing a check or rolling it over into an individual retirement account (IRA).
Some of the pros and cons of using this approach are:
The fees can be lower than in your current 401k
Managing multiple 401(k)s can be difficult
Your previous employer will be responsible for overseeing the plan and its costs
You are no longer contributing to the plan
Your money will be protected from creditors
If your previous company undergoes a merger or acquisition, accessing your plan can be a hassle
The number of investment choices available is limited
Roll Over the Money into Your New Employer’s 401(k)
For the sake of simplicity, you can also roll over the funds from your 401(k) into the new plan offered by your employer. You’ll need their permission to do this.
There are two ways to transfer the funds to the new 401(k). You can opt for a direct transfer and move the funds directly to the new plan after filling out the necessary paperwork. You can also ask your previous employer to issue a check. Make sure you deposit these funds into the new plan within 60 days. If you don’t, you will have to pay income tax on the entire amount.
Like with the first option, your money will not be accessible to creditors and your employer will have the fiduciary responsibility of overseeing the plan’s management. Some of the other pros and cons of this option include:
Managing a single 401(k) is simpler for retirement planning
You might need to fill out some paperwork
If your new plan offers good investment choices and is cost-effective, then you can grow the value of these funds
The plan may charge a high fee and offer poor investment options
You can incur a tax penalty if you miss deadlines
You might be asked to pay a fee for initiating a roll over. This is a one-time cost.
Roll Over the Funds into an IRA
If you are wondering what to do with your 401(k), then you can also roll it over into an IRA or a Roth IRA. These are called “Individual Retirement Accounts” because they are owned solely by the individual – you’ll need to set them up and either hire an investment manager, use an online passive, algorithm driven platform, or invest the funds yourself. If you plan to use your 401(k) as a source of retirement income, these accounts will serve you well.
Here are some of the pros and cons of using this option for retirement planning:
There is a wide variety of investment options available
You might need prior investment knowledge to build a portfolio
You get to stay in control of your investments
There may be trade costs or fees that are higher than your current 401(k) plan
There is no limit to the amount of money you can move from your old 401(k)
Note: If you choose to roll over your 401(k) into an IRA or a new 401(k) plan, make sure you don’t accidentally withdraw the money instead of moving it. If you are under the age of 59.5, you will have to pay a 10% penalty on these withdrawals.
Cash Out Your 401(k)
The final option is simple. You can cash out the funds in your 401(k) plan. This is usually not the best course of action because not only will it deplete your retirement savings, but you will also have to pay income tax on the entire amount.
The Bottom Line
When it comes to figuring out what to do with your 401k, there are plenty of choices at your disposal. Depending on your employer’s new 401k plan and the pros and cons of each option, you can choose what works best for you.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.