What to do With a 401k When Leaving a Job

If you are leaving a job with a 401k, whether it's by your choice or not, you have a few things to consider before you decide what to do with your 401k balance. Don't cash out your 401k until you read this. You may regret it. It's important for you to know the pros and cons of taking a 401k distribution or rollover before you go ahead with it.

Option 1 is to rollover your 401k to a new plan or IRA.

If you are going to work for another company with a 401k plan you may be able to rollover your 401k balance to that new plan immediately, even if you don't yet qualify to contribute money from your paycheck into the plan. Many plans offer an immediate rollover eligibility option. This is attractive if you wish to keep all of your 401k money in one place. Ask your plan administrator at your new company if this is an option for you.

Another rollover option is to move your money to an IRA that you open at a financial institution. While this is not a 401k, you can rollover your 401k balance into an IRA. The benefit of an IRA is that you can shop around to find just the right product for you at the right price for you and you canm invest in the investments that you want.

There may be a small fee for taking a rollover distribution. In addition, an IRA will most likely cost you a recurring monthly or annual fee, so check out your options before you ask for a check.

When leaving a job you can take a 401k distribution in almost all cases. This means that you can simply "cash out" of the plan and take the money.

This should only be considered if you desperately need the money because it does two things to you. First, it means that your retirement fund is depleted and that is not good news for your retirement. Second, it means that you will pay taxes. Expect to have 20% of your vested balance withheld as taxes before you get your check. The difference between that and your normal tax rate will be due when you file your taxes for the year. In addition to that, if you are less than 59.5 years old you will pay an additional 10% tax when you file your tax return.

If you decide that a distribution is right for you, contact your current 401k administrator to start the process. Depending on your plan, you might initiate the distribution online or you may have to submit a paper form to your employer.

Like a rollover, there may be a small fee for taking a distribution, in addition to the taxes you will end up paying.

A perfectly find option for your 401k when you leave a job is to leave the money alone. That's right. Just leave it in the plan to accumulate over the years.

You will have this option if you have enough money in the plan. An employer can force you out of the plan if you have less than $1,000 in your 401k, but if you have more than this you have the ability to leave the money there.

Leaving your money in the plan is a great choice if your expenses are low and your investment options are satisfactory. There may be no need to rollover your 401k funds to another plan if you are happy where you're at. Even if you choose this option now, you can decide at a later time to rollover the money elsewhere, so this is not a permanent choice.

If you leave the money in the plan, you should expect no fee changes to you and no taxes due. Keep in mind, however, that you will not be eligible for a 401k loan if that was previously an option to you.