What happens to your 401(k) when you leave your job? This is a common question, and one that we are here to help you with. You have several options when it comes to dealing with your retirement account when you leave your employer.

Your options are:

1. Cash out the funds

Advantages: Immediate funds.

Disadvantages: This should be a last resort option for all individuals due to the potentially severe tax implications of withdrawal. Withdrawing early (before age 59 ½) results in a 10% early withdrawal penalty in addition to ordinary income taxes. If you have not yet reached age 59 ½ and are strapped for cash, you might consider withdrawing only what you absolutely need and look to find other sources of cash thereafter.

2. Leave assets in a previous employer’s plan

Advantages: You will need to check with the human resources department of your past employer to see if the retirement plan permits you to leave your account behind. For many people this is the easiest solution as you do not have to do anything.

Disadvantages: With this option, you’ll no longer be able to make plan contributions or take plan loans, and you may have fewer investment options than with an IRA. It is also easy to lose track of these accounts if you do not keep your former employer up to date with your address changes.

3. Transfer the assets into a rollover IRA

Advantages: By rolling your money into an Individual Retirement Account (IRA), you maintain the tax advantage of deferring income taxes until retirement and have more control over the investments in the account. If you choose this option, make sure that you consult with your tax advisor as there are limitations on how often a rollover can take place.

Disadvantages: After you reach age 70 ½ you are required to take RMDs (Required Minimum Distributions) every year even if you are still employed. Also, generally speaking, federal law protects assets in workplace retirement plans more so than IRA assets.

4. If permitted by your new employer, roll over the assets to the retirement plan at your new company

Advantages: If you are permitted to do this, it allows for consolidation of your retirement monies in one place.

Disadvantages: You will be bound to the new employer’s plan rules which may have certain transaction limits, and compared with an IRA, the 401k might have a limited number of investment options.

Your 401k could hold a substantial portion of your savings, so take time to make an informed decision about what you’d like to do with your account. A lot will depend on your age and financial situation, so read up on your options and the risks involved with each option.

Need more advice? Our Team is here to help.