With a job offer at a new company in hand, you might be more than ready to move on and say so long to your current employer. But, if a 401(k) plan was one of the benefits you took advantage of while in your current job, you may be wondering about your 401(k) options when you leave a job.
Just because you’ve switched jobs, you’re not necessarily required to move your 401(k) too. You may be able to keep it in your current employer’s plan to grow and mature. And if you’re out of the job because of a layoff or termination, it might be the best course of action until you get back on your feet.
There are some considerations if you keep your money where it is. The employer may close out your account and send the money to you if there is less than $5,000 in it, according to Fidelity. What’s more, you won’t be able to add money to it and your options for withdrawal will be limited.
Make a move
If your new employer offers a 401(k) plan, you could move the money into its plan and consolidate all your retirement earnings there. Ameriprise, the financial firm, says the best way to do this is to directly transfer the funds into the new retirement plan. This “direct rollover” will ensure your funds remain tax free as you pull them from one account and send them to the next.
You can either have the funds directly transferred to the new account or opt to get a check for the full amount. If you get a check, be sure to deposit it into the new account within 60 days or you might have to pay taxes on the money, according to Investopedia. The human resources department of each employer can help you set up this transfer.
Do it on your own
If your new employer doesn’t offer a 401(k) plan or you prefer to do it on your own, you can shift your savings to a rollover Individual Retirement Account. These rollover IRAs are designed to collect money from your old 401(k) accounts and transfer them into a traditional IRA.
Just like the direct rollover into your new employer’s plan, when moving your money into a rollover IRA, you won’t face any extra costs and your retirement savings can continue to grow.
You can elect to have the funds transferred directly into the IRA or receive a check, which you deposit in your new rollover IRA. Again, be sure that the deposit happens within 60 days of receiving that check to avoid any taxes.
Keep the money
It might be tempting to cash out that big pot of money, and many choose this option. According to Fidelity, one in three investors cash out their 401(k) before reaching the age of 59 ½, usually when they’ve changed jobs. But this is almost never a good idea.
In the short-term, you’ll have to pay federal and state income taxes on the money. And, if you’re less than 59 ½ years old, you’ll face a 10 percent early withdrawal penalty.
But beyond the short-term consequences of fees and taxes, the long-term ramifications could hurt even more. With little to no money saved for retirement, it may be next to impossible to ever catch up and position yourself for a properly funded retirement, and for women, the retirement readiness gap can be even greater. It’s no wonder more people are working into their 70s and 80s.
As you consider 401(k) options, the choice is yours to make and will depend on your family’s situation. But your best choice will almost always be to keep your retirement savings growing, so you have the money to support yourself when you’re ready to leave the workplace for good.
The team at CESI is committed to helping you make wise financial decisions and to helping you understand how to get out, and stay out of debt. For a free debt analysis, contact us and find out how we can help.
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