When it comes to retirement planning, your 401k is often a cornerstone of your financial future. Therefore, it’s important to know how to handle your 401k when changing jobs. While it can be tempting to cash out your 401k, you could be sacrificing thousands of dollars in the long run.
Instead, there are several options for managing your 401k when transitioning to a new job. In this article, we’ll explore the different options for managing your 401k when changing jobs, as well as the potential advantages and drawbacks of each.
Leave Your 401k in Your Former Employer’s Plan
One option for managing your 401k when changing jobs is to leave it in your former employer’s plan. This option allows you to keep your money with your former employer and continue to benefit from their investment options and plan features. Additionally, if you’ve been with your former employer for many years, you may have built up a sizable amount of money in your 401k plan, and leaving it with your former employer can allow you to continue to benefit from any existing employer contributions or matching contributions.
The downside of leaving your 401k in your former employer’s plan is that you may be limited in your investment choices and may not have access to the same level of customer service. Additionally, you may have to pay higher administrative fees for leaving your money in your former employer’s plan.
Rollover Your 401k to Your New Employer’s Plan
Another option for managing your 401k when changing jobs is to rollover your 401k to your new employer’s plan. This option allows you to keep your money with your new employer and benefit from their investment options and plan features. Additionally, you may be able to take advantage of any employer contributions or matching contributions offered by your new employer.
The downside of rolling over your 401k to your new employer’s plan is that you may have to wait until you’ve been with your new employer for a certain length of time before you can take advantage of any employer contributions or matching contributions. Additionally, you may have to pay higher administrative fees for rolling over your money to your new employer’s plan.
Rollover Your 401k to an IRA
Another option for managing your 401k when changing jobs is to rollover your 401k to an individual retirement account (IRA). This option allows you to keep your money in a tax-advantaged account and benefit from the wide range of investment options available in an IRA. Additionally, you may be eligible for certain tax benefits when rolling over your 401k to an IRA.
The downside of rolling over your 401k to an IRA is that you may have to pay higher administrative fees. Additionally, you may not have access to the same level of customer service as you would with a 401k plan.
Cash Out Your 401k
The final option for managing your 401k when changing jobs is to cash out your 401k. This option allows you to access the money in your 401k, but it also comes with certain drawbacks. If you cash out your 401k, you will be required to pay taxes on the money you withdraw, as well as a 10% early withdrawal penalty. Additionally, you may be sacrificing hundreds or even thousands of dollars in potential investment gains in the long run.
Final Thoughts
Managing your 401k when changing jobs can be a difficult process, but it’s important to make sure you’re making the best decision for your financial future. There are several options for managing your 401k when transitioning to a new job as outlined earlier. Each option has its own advantages and drawbacks, and it’s important to consider your options carefully before deciding which option is best for you.
