Taking up a new job will come with one happy new and one frustrating decision. Happy news is that you’ll be exposed to new challenges, new environment and learn new ways of dealing with things. While the frustrating decision is yet left to be made, the one with your old 401(k) investment decision. As you consider your options, keep in mind that one of the greatest advantages of a 401(k) plan is that it allows you to save for retirement on a tax-deferred (or in the case of Roth accounts, potentially tax-free) basis. When changing jobs, it’s essential to consider the continued tax-deferral of these retirement funds, and, if possible, to avoid current taxes and penalties that can eat into the amount of money you’ve saved. You are left with 4 options at your disposal:
Option 1 – Withdraw your money and enjoy:
When you put down your papers to quit the job, you can ask your company to pay you in lumsum. So the cut a check in your name and you can enjoy with the cash you have in hand or maybe use it for your personal expenditure. But from a financial point, this is the worst decision you could make out of the 4 available options. This is because you have to pay a direct federal income tax to the government, a direct out of pocket cash expense. If the amount is large enough, you could even be pushed into a higher tax bracket for the year. If you’re under age 59½, you’ll generally have to pay a 10 percent premature distribution penalty tax in addition to regular income tax, unless you qualify for an exception.
Option 2 – Leave the Funds with your previous employer:
After checking your previous employers plans,you have an option to keep the funds with them provided the amount is more than $5000. Most of the companies allow such facility,the benefits of which include:
- Penalty-free withdrawals if you leave your job in or after the year you reached age 55 and expect to start taking withdrawals before turning 59½.
- Institutionally priced (i.e., lower-cost) or unique investment options in your old plan that you may not be able to roll into or hold in an IRA.
- Money-management services that you’d like to maintain (Note that these services are often limited to the investment options available in the plan).
- Broader creditor protection under federal law than with an IRA.
However, in this option withdrawal option is limited and you have few investment options.
Option 3 – Roll the assets into an IRA:
Rolling your 401k to an IRA has no tax consequences, providing you move the money properly. Transfer your money to your IRA using what is known as a trustee-to-trustee transfer, in which the money moves directly from the 401k to the IRA.
A big advantage of rolling your money into an IRA is that this generally gives you the broadest array of investment options. Additionally, you may withdraw money penalty-free for qualified home buying and higher education expenses.
Option 4 – Roll it into your new 401(k):
If your new plan has low fees and good investment options, rolling your old account into this one can help streamline your accounts and make it easier to manage your retirement savings. You would like to have everything in one place. The advantage of this strategy is that you can preserve your ability to borrow from your 401k, if your new plan offers loans, said Timothy Cunningham, CFP with EQUIPOISE Wealth Management Inc., in Denver. (You can’t take a loan from an IRA or from a 401k with a former employer.) A downside to rolling your money to a new employer’s plan is that you may not like the new investment options.
It’s important to make an informed decision about what may be a significant portion of your savings. As discussed above, your choice will depend on factors such as your former and current employer’s plan rules and available investment options, as well as your age and financial situation. In addition, you may want to think about your investing preferences, applicable fees and expenses, desire to consolidate your assets, and interest in receiving investment guidance.