If you’re leaving or have left a job where you have a 401K, you should consider what to do with it. Many people assume they can leave it as is, but that’s not always the case. Sometimes, depending on your balance, your old employer can even force you to cash out the 401K, incurring a tax liability for you and possibly causing you to lose money.
Before this happens to you, know what to do with your 401K after leaving a job.
How Much do you Have?
First, look at your balance. If you have over $5,000 in your account, you may be able to leave it with your old employer. While that’s not the best option, it can be a temporary solution while you figure out your next steps.
If you have less than $1,000 in your account, your old employer may be able to cash it out and send you the check (not recommended). If you have between $1,000 – $5,000, your employer may still be able to force you out of their plan, but you may be able to roll the funds over rather than withdrawing them.
So, what are your options with your 401K when leaving your job?
1. Roll it Into a New 401K
If your new employer offers a 401K, you can rollover your old account into it. The process is simple, but first, find out how long you must be employed with the new employer before you’re eligible. Some employers make you wait months before you’re eligible.
If you’re eligible, simply tell your old administrator to transfer the funds over. You’ll complete a Direct Transfer document, and they’ll handle the rest. You can also have the funds sent to you via check, but you must deposit them into your new 401K within 60 days to avoid an early withdrawal penalty and tax liabilities.
2. Roll it into an IRA
If you are working for yourself or your new employer won’t offer a 401K, consider opening your own IRA. You have limitless options when opening your own account. Do your research and find a broker with minimums you can meet and affordable fees, along with the investments you want to invest in.
Like with a 401K rollover, doing a direct transfer is the safest way to roll over your funds, but you can also receive a check and deposit the funds in your new retirement account within 60 days.
3. Cash it Out
It’s always an option to cash out your 401K at an old employer but it’s not recommended. You’ll pay a 10% penalty for early withdrawal plus increase your tax liability since you’ll owe taxes on the entire amount.
If you have a large amount in your retirement fund, it’s probably not worth the money since you’ll lose a large percentage of it to the penalty and taxes. It’s best to leave it until you can roll it over into an IRA or 401K.
4. Leave it with your Old Employer
If your employer allows you to leave the funds, especially if you have a balance of over $5,000, you may consider this as an option. A few key factors affect this decision.
- Will you remember to actively manage the account? Often we forget about ‘old’ accounts and stop managing them. If you don’t reallocate your investments or at least check up on it once in a while, it may not perform how you hoped, leaving you with less money than intended for retirement.
- Does the plan have great investment options? 401K accounts are limited to the investments offered in the plan. If your old employer offers investments, you can’t find elsewhere or you prefer to leave them where they are, it may be an option.
Knowing your options upfront will help you determine which option is right for you. Don’t look at how much money you’ll put in your pocket now, but rather how much money you can save (avoiding fees and taxes) and continuing to work towards your retirement goal.