What Should I Do with My 401(k) When I Leave My Job?

If you are changing jobs or nearing retirement, understanding your options for your 401(k) account is essential. Controlling where your money is provides peace of mind.

Whether you withdraw your money or roll it into another retirement account impacts your financial goals and tax obligations. The following information can help guide your decision.

Option 1: Cash Out Your 401(k) Account

Cashing out your 401(k) account typically is not recommended:

• You can ask your former employer for a check and deposit the money into a qualified retirement account within 60 days; however, your former employer might withhold 20% to pay the IRS for your distribution.

• The IRS might classify the cash-out as an early distribution, charge a 10% penalty, and incur taxes.

Option 2: Keep Your 401(k) Account with Your Former Employer

If you like your current investment options, have reasonable fees, and your employer allows it, you might want to keep your 401(k) money where it is. However, this option can come with high risks:

• You might be unable to ask the plan administrator any questions.

• There might be higher fees for former employees.

• You cannot make additional contributions.

• Your former employer could move your 401(k) account to another provider.

• If your account balance is between $1,000 and $5,000, and your former employer wants to close your old 401(k) account, they must transfer the balance to an Individual Retirement Account (IRA) in your name and notify you in writing.

• If your account balance is under $1,000, your former employer can send you a check, which you must deposit into a retirement account within 60 days to avoid paying taxes and penalties.

Option 3: Rollover Your 401(k) Account to Your New Employer

If you want to keep your money in one place, and your new employer’s retirement plan allows it, you could transfer your assets from your previous employer’s plan to your new employer’s 401(k) plan. Then, you can easily see how your assets are performing.

As long as your money goes from your old account to your new 401(k) account, there should not be any tax penalties associated with the rollover. Contact the plan administrator at your previous employer and request a direct rollover.

Option 4: Rollover Your 401(k) Account into an Individual Retirement Account

Rolling over your 401(k) account into an IRA typically offers additional investment choices and potentially lower fees. The three types of rollovers include:

• Rollover from a Traditional 401(k) to a Roth IRA: Because your 401(k) contributions were made pre-tax, and a Roth IRA is an after-tax account, you would owe taxes on the rolled-over amount in the year of the rollover. However, you wouldn’t owe taxes on qualified distributions from the Roth IRA during retirement.

• Rollover from a Traditional 401(k) to a traditional IRA: Taxes on the money rolled over and any investment earnings would be deferred until you take distributions during retirement.

• Rollover from a Roth 401(k) to a Roth IRA: Because a Roth 401(k) and a Roth IRA are funded with after-tax dollars, you would not incur taxes on this transaction.

Pros and Cons of Rolling Over a 401(k) Account into an IRA

The pros of rolling over a 401(k) account into an IRA include:

• Wider investment selection, including stocks, bonds, mutual funds, index funds, and exchange-traded funds

• Potentially lower costs

• Ability to make additional contributions

• Deferred taxes with a 401(k) direct rollover into a traditional IRA until you make withdrawals during retirement

The cons of rolling over a 401(k) account into an IRA include:

• Whereas 401(k)s and rollover IRAs are protected in bankruptcy and against creditor claims, IRA protection from creditors varies by state, and bankruptcy protection is limited.

• Although you might be able to tap into your 401(k) at age 55 if you leave your job, you typically cannot take qualified distributions from an IRA until age 591/2.

• If your 401(k) plan holds company stock, it typically should be rolled over to a taxable brokerage account rather than an IRA. Consulting a licensed tax professional is recommended.

*This information is for educational purposes only.