No 401K Left Behind
Whether retirement is around the corner or just a speck on the horizon, your 401k is a very important tool and how you handle it when you change jobs can be crucial to your financial well-being. This begs the question:
What Should I Do With My 401K When I Leave My Job?
Here are your options:
Nearly half of all Americans leave their 401ks behind when they change their jobs. This is unlikely a deliberate decision but rather, the path of least resistance.
The Downside: Most 401ks have limited investment options and higher administrative costs. Additionally, it can create an unnecessary burden to have to manage several old 401ks, as the average worker is expected to switch jobs more than 10 times over their lifetime. Imagine having to pull money from, or consolidate, over 10 different accounts in retirement!
Cash It Out
It may be tempting to take the money and run, especially if you have other expenses to consider. However, this really should be done only in extreme circumstances, as your last option.
The Downside: This withdrawal will be a taxable event. Additionally, if you are under the age of 59 ½ (or 55 in some cases), you will also be assessed a 10% penalty. However, perhaps the greatest concern is the loss of the power of tax-deferred compounding that a retirement investment affords you. This will become especially problematic if you exercise this option repeatedly.
Roll It Over to Another 401K
Some companies will allow you the option of rolling your old 401k into your new one.
The Downside: As mentioned above, 401ks have limited investment options and higher administrative costs. By rolling over an old 401K into a new one, a larger portion of your retirement savings will now be subject to these same restrictions.
Roll It Over to an IRA
When you leave a job, for retirement or otherwise, you have the option to roll your 401K into a new or existing IRA.
The Downside: Your IRA funds will be subject to Required Minimum Distributions (when you must begin to take money out of your retirement accounts) at 70 ½ years old, whereas that can be delayed with a 401K if you work past 70 ½. Also, loans are not available through IRAs.
Generally, the best option is to roll your old 401K into an IRA. IRAs have great flexibility and give their owners more control. This strategy also helps simplify your financial situation as future 401ks (or other IRAs) can be rolled over to an existing IRA. In addition, there are many estate planning advantages to an IRA over a 401K. You can choose to work with a financial advisor or to manage it yourself, but the flexibility of an IRA means that if you are unhappy with your results, you can make a change at any time.