A fresh start at a new job can mean more money, better benefits and maybe even a new job title. But while you are looking forward to your new job, it’s important to tie up any loose ends at your old one—particularly when it comes to your 401(k). Here are the four options for the assets you’ve accumulated in your previous employer’s workplace plan:
Option 1: Roll it over into an IRA
Rolling old 401(k) funds into an IRA is the best option for most people, says Ron Teasdale, Financial Advisor, SunTrust Investment Services, Inc., located in Miami. The reason: You still benefit from tax-deferred growth, while gaining more flexibility with your investments. “There are typically a lot more options when investing in an IRA,” explains Teasdale. “You can pretty much invest in anything you want.”
One note of caution: Have your 401(k) administrator send the funds directly to your IRA account—a process known as a direct rollover. If you have the funds sent to you first, you may face taxes and a 10 percent early withdrawal fee if you fail to follow IRS rules.
Option 2: Roll it over to your new 401(k)
Transferring assets from your old 401(k) to your new workplace account is a great option if your new plan offers investment options that meet your needs. Not all employers allow this option, however, so check with your plan administrator before you make any moves. The benefit of this approach: You’ll be consolidating your retirement savings in one account.
Option 3: Leave it where it is
If your old employer-sponsored plan offered better options and lower fees than your new one, you might consider leaving your assets where they are. This option is typically only available for accounts worth more than $5,000. Just remember that once you leave the company, it will be harder to keep up-to-date with how your plan is being managed. It may also be harder to keep track of your investments. “You might have duplication across different accounts and not realize it,” says Teasdeale. “The more you consolidate your investments, the easier it is to get a full picture of your diversification.”
Option 4: Withdraw it as cash
While it might be tempting to cash out your savings, doing so is almost always a terrible idea. You will have to pay taxes on the withdrawal, and face a 10 percent early withdrawal penalty if you’re under age 59 and a half—not to mention that the withdrawal may push you into a higher tax bracket. Worse yet: Once withdrawn, those funds no longer benefit from tax-deferred growth. “You want that money growing tax-deferred for as long as possible,” says Teasdale. “We’re living longer, so our retirement savings need to work harder.”
If at all possible, keep your savings working for you by choosing one of the first three options above. Then you can dive into your new job, confident that you’ve taken care of one of your most important assets.