Money Management

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.

Other Articles by Jonathan Dyer