Managing your 401(k) after leaving a job is important in order to manage your future earnings and avoid excessive costs right now.
When changing jobs, often times you have to pack up more than your desk. It’s up to you to determine what to do with your 401(k) plan. The HR Department may give you a little help, but you should know your options before making a move.
Check out the 5 ways you can manage your 401(k) after leaving a job.
Option 1: Don't touch it
The path of least resistance is to do nothing – most employers allow you to leave your 401(k) funds if you have at least a $5,000 balance.
Pros:
- If you like the investments you don’t have to worry about trying to replicate them with a new 401(k) or IRA.
- You get more time to decide what to do with the funds.
- You don’t have to worry about taxes or penalties.
- You can always move your money later.
Cons:
- It can be complicated to manage more than one investment account, especially once you retire.
- It may be harder to access your funds since you no longer work there.
- You may not be able to borrow against your funds.
Option 2: Roll the funds into an IRA.
Most people, once they have left their old employer, will move the money out of the account managed by their employer and into a new IRA account they set up at the institution of their choosing.
Pros:
- You have the freedom to choose the financial institution.
- You can choose the type of investments, diversify your portfolio, and the level of aggressiveness of the investments. There are endless options with a rollover IRA versus a 401(k) plan.
- The money remains tax deferred.
Cons:
- Your money doesn’t have the same legal protection from creditors or those bringing a lawsuit against you.
- You may not be able to borrow against the funds.
Roll the funds into your new employer’s 401(k) Plan.
Pros:
- You avoid tax penalties as long as you deposit the funds in the new 401(k) within 60 days.
- You can have all of your retirement funds in one place making them easier to manage and track.
- You may be able to borrow against the funds (in an emergency) at your current employer; this isn’t an option if you keep the funds in your old 401(k).
Cons:
- Your investments are limited to what the company offers. If it’s not a great offering, your earnings may be lower or you may pay more in fees.
- Your employer may have a longer waiting period, which means you can’t roll the funds over until you are eligible for a 401(k) at the new company.
Take distributions from your 401(k) account.
Pros:
- You can access your funds before you retire.
- You don’t have to worry about figuring out where to invest the funds.
- You may have access to emergency funds should you need them after facing an illness, injury, or another issue that causes financial distress.
Cons:
- You may owe a 10% early withdrawal penalty unless 1) you are 55 years of age and leave a job or 2) are at least 59 1/2 years of age.
- You may owe taxes on the funds you withdraw.
Cash out your 401(k).
Pros:
- You’ll have instant access to the cash you invested.
- You can do what you want with the funds, including investing it elsewhere.
- You don’t have to answer to anyone regarding investing your funds.
Cons:
- You may owe a 10% penalty and taxes on the entire amount withdrawn.
- You may lose the future earnings your money could have earned if left in a retirement account.
Managing your 401(k) funds is important after leaving a job, but don’t make a rash decision. You often have a least a few months before choosing your next move. Look at the pros and cons of each option and decide the best way to maximize your future earnings while limiting your penalties and taxes right now.