What to Do With Your 401(k) From a Previous Employer

When leaving a job with an employer there are obviously a number of changes you will experience and decisions you will need to make about your future. One such decision that is sometimes forgotten is what to do with the 401(k) you had under your former employer. In addition to any contributions you may have made to your account, you may also have a vested chunk of matching funds or even profit sharing in your 401(k). You certainly don’t want to lose those funds but it may not be obvious what to do to preserve it. Do you cash it out, leave it be, or roll it over into an IRA?

Cashing Out Your 401(k)

Recently USA Today looked at this very dilemma. As they point out, unless you’re retiring, cashing out your 401(k) when leaving a job is rarely if ever a good idea. In addition to the taxes you’ll have to pay on the money you collect you’ll also be assessed a 10% early withdrawal penalty.

You should also be aware that if you have an outstanding loan from your 401(k) account at the time you leave your job you will typically need to pay back the balance within 60 days. If you fail to pay it back in that time it will be accounted for as withdrawal and that 10% penalty (and the appropriate taxes) will apply.

Keeping Your 401(k)

Depending on your employer’s rules and the balance of  your account you may have the option to simply keep your 401(k) as it is. This could be a good option if you are happy with how your funds are invested and with the returns you’re getting. In these cases, and depending on your situation and personality, it might make sense just to leave you’re retirement savings on “auto pilot.” Another option is that, in some cases you may be able to combine the 401(k) from your old employer with that of your new employer. However the most popular option for what to do with a 401(k) is to roll it into an IRA.

Rolling Over to an IRA

Unlike 401(k)s that typically only have a few options for investing, IRAs have much more flexibility. This allows you to be as hands-on as you want with your investments and tailor them to your risk tolerance. For example you could put your money into mutual funds similar to a 401(k), select stocks specifically you would like to buy, or even invest your money on a marketplace lending platform. The other advantage to an IRA is that you can be more aggressive with your investments when you’re younger, but move your money to more conservative investments as you near retirement.

The good news is that you don’t have to make a decision right away. Unless you have an outstanding loan from your 401(k) that you will need to pay back, you can keep your account where it is until you’re ready to move it. Because of this the best thing to do is to look at all of your options and choose the one that’s best for your individual needs.

Author

Jonathan Dyer

I'm a small town guy living in Los Angeles looking to make solid financial decisions. I write for a number of finance websites, including HuffingtonPost and Business2Community. I founded DyerNews.com in 2015 to focus on personal finance and the emerging FinTech markets.

Other Articles by Jonathan Dyer

Bilt Rewards Launches Travel Portal with Benefits for Cardholders

Last year, the startup Bilt made a splash when it announced a new service that would reward users for paying their rent. That premise was then expanded upon with the launch of the Bilt Mastercard, which is issued by Wells Fargo. Now, continuing to capitalize on both the hype of their product and the demand for travel, Bilt has debuted another new offering for customers. This week, Bilt Rewards announced...

Cash App Introduces Round-Up Investing Feature for Debit Card

Debit card customers looking to grow their investments gained a new, automated option today as Block Inc. (formerly Square Inc.) officially announced a new feature for its popular Cash App. Now, customers with the Cash App Cash Card can opt into Round Ups as a means of growing their investments. When this feature is toggled on, Cash App will round up debit card purchases to the nearest dollar and invest...

Marqeta Expands Credit Program with New APIs and More

A FinTech that specializes in creating credit card experiences is rolling out some new features. This week, Marqeta announced what it calls a "significant expansion" of its credit platform. This includes more than 40 new credit APIs that will further help clients craft and launch their own credit card products. Additionally, the company notes an updated intuitive dashboard. Using this platform, businesses can create unique card options that can not...