All good things come to an end, especially in an increasingly frictional employment marketplace. Whether you would grade your prior position as a good thing, a bad thing, or somewhere in between, if you accrued enough time there, chances are you began to pay into a company-wide 401(k) plan. Now, you’re off to a fresh start while your money stays behind in your previous employer’s plan. As grateful as you are for those tax breaks and matching contributions, you may want to invest your money going forward. If you’re not sure what to do with your 401(k) after you leave your job, we don’t blame you—you have several options at your disposal. Here are four of those options and the pros and cons of each.
The easiest way to settle your old 401(k) is to take the money and run. Upon completing your employment, you may withdraw your funds from the plan in a direct cash payment. If your departure resulted from a termination, layoff, or a hard personal decision that leaves your personal finances in question, you may want to receive this one-shot cash infusion as a transfer to your checking account or immediate cash on hand. However, remember that this quick payout comes at a price. 401(k)s are retirement plans, and the IRS disincentivizes early access to retirement funds by designating withdrawals as taxable income and saddling the withdrawer with a 10 percent penalty. While you don’t have to leave money in a 401(k) after your departure, cash out with care.
Leave It in Place
If 401(k) investment has worked for you thus far, why mess with a good thing? Sometimes, the easiest choice is the right one. Even after you leave a job, you may be able to continue your participation in your former employer’s 401(k) plan. This is a good idea if you trust yourself to keep current with your 401(k).
Roll Over to a New 401(k)
If you don’t like not being able to keep tabs on your investments, consider keeping your 401(k) investment closer at hand. In many instances, you can transfer the money in your 401(k) to a new employer’s plan. If you’ve contributed at least $5,000 to your old 401(k), you can roll over your contributions to your new 401(k).
Roll Over to a Self-Directed IRA
Your fourth choice of what to do with your 401(k) after you leave your job is a combination of cashing out and moving to a new plan. Instead of continuing with a 401(k), you can use your contributions to fund a new self-directed IRA. These investment instruments allow you to save for retirement through a wide assortment of conventional and less conventional opportunities. Using your old 401(k)’s money can give your new IRA a firm foundation as you invest for retirement.