Fortunately, saying goodbye to a job doesn’t mean saying goodbye to your retirement savings. If you have a 401(k) from an old company, but you’re making a transition in your career, you have a few different options for managing the balance: you could keep your 401(k) with your old company, opt for a 401(k) rollover, or even cash out. The choice you make could have a significant influence on your retirement savings, so it’s essential to make an informed decision.
Your 401(k) may stay put
When you leave a job, your 401(k) initially stays with your former employer. If you’ve invested over $5,000 in your 401(k), you could let your account remain where it is. Your money may still grow and benefit from the same investment opportunities available when you worked for the company. However, it’s important to note that you’ll face a few limitations if you opt to leave your 401(k) with a previous employer:
- You can’t continue making contributions to your former plan.
- You no longer have the option to borrow from your plan’s assets.
- While you could change your investments, you’re restricted to your previous employer’s portfolio.
If you’ve invested less than $5,000, your employer may mail you a check after some time, or you could arrange another option for your 401(k).
You could roll over your 401(k)
To continue contributing to your 401(k), you could transfer it into another retirement savings account. A direct transfer of funds only requires some documentation and could help you avoid additional taxes.
For an indirect rollover, you receive the balance as a check. You then have 60 days to deposit that check into a new account. Otherwise, you could incur some significant tax penalties.
Generally, you could roll over your 401(k) in one of two ways.
Roll over to a new plan
If your new job offers a 401(k) and allows rollovers, you may roll your existing savings into your new plan. This option has some advantages: it simplifies managing your retirement accounts and helps increase your savings potential as you continue contributing to the plan. If it offers low-cost investment options that interest you, moving into the new plan could be a good option for increasing growth potential.
Roll over to an IRA
But what if you’re not starting a new job or your new company doesn’t offer a 401(k)? Fortunately, you still have options. You could roll over your 401(k) into an individual retirement account (IRA). A trusted financial institution may offer a wide range of investment options that could help your retirement investments grow. An IRA is also a good option if you’re unhappy with the investment opportunities at your new or former company.
You could cash out your 401(k)—for a price
You could also liquidate your 401(k) and pocket the lump sum payout you receive. However, this can be a costly decision. Obviously, cashing out your 401(k) reduces your retirement savings, which could have lasting effects.
In addition, you become liable for taxes on the total amount you withdraw. You may also incur several other fees and penalties. In most cases, the amount you’d receive isn’t worth the high cost of cashing out your savings.
The bottom line
When managing your former employer’s 401(k), you have several options to consider. If your investment value surpasses $5000, you could choose to keep your account with your old employer.
However, if that’s not the case, you might want to consider transferring it into a 401(k) at your new company, investing it in an IRA, or even withdrawing it. Navigating your options with care today could help you have a comfortable retirement tomorrow.
