Options for Your 401(k) When You Leave Your Job
- April 19, 2021
- Featured, IRA's, 401(k)'s, and Retirement Accounts
We all know that a 401(k) is one of the most important retirement planning tools we have. You pay into it for your entire career and will likely need to rely on it, among other income sources, for decades in retirement. The potential tax benefits and power of compound interest can make it a great saving and investment tool for anyone who practices financial discipline and contributes regularly. It is important to have a plan for your 401(k) when you leave a job – whether you’re retiring or not.
When you retire or leave your job, you will have to decide what to do with your 401(k) or other retirement account at that company. You need to consider your tax burden, investment options, fees, and retirement strategy. Here are some options and considerations.
- You can cash out of your 401(k), in which case the funds would be taxed as ordinary income. However, cashing out of an old 401(k) will cause you to lose the tax-deferred benefits of the account and you could pay additional tax penalties depending on your age and circumstances.
- You can roll it into a new 401(k) at a new job. A rollover might be a good choice if your new 401(k) has particularly low fees or unique investment options. But, you will want to do your research about the investment choices or the fees you’ll have to pay with the new 401(k) plan.
- You can continue with the old 401(k). Continuing with your old 401(k) means leaving it with your former company, which can come with downsides. Your old company can make changes to plan administration and recordkeeping, as well as your investment options. However, if you are over 55 in the year you separate service, you usually can begin withdrawing from a 401(k) without the ten-percent early withdrawal penalty.
- You can roll the old 401(k) into an IRA. Rolling your 401(k) into an IRA can potentially mean access to more investment options and greater control over your investments. It could also mean lower investment fees, and less complication if you have one IRA as opposed to multiple 401(k)s.
There are all kinds of changes that happen later in life, and leaving a job where you have a 401(k) or similar retirement account is one of them. Before making a big financial move with your 401(k) if you are leaving a job or retiring, consider how it could affect your tax situation and your investment options. You’ve worked hard and deserve to keep more of your retirement income.