Today is your last day at your job. Maybe you’ve got something new lined up that starts in a week or two. Maybe you’re retiring with a ton of free time in front of you. Or maybe they gave you the boot. Regardless, Johnny Paycheck is queued up on the radio and you’re off to something better.
What happens to your 401(k)?
- You Leave It With Your Previous Employer
You don’t technically have to do anything with it. You can leave your account in your previous employer’s 401(k) plan. However, if your savings in the plan is under a set amount, be aware that they may choose to distribute the funds to you.
Why would you do this? There may be some benefits to your old employers plans, like investment options that are low-cost or have limited availability outside of the plan. Or there may be some built-in protections from creditors. Or you may have been in a plan that allowed you to borrow from your funds and wish to keep that option open.
Regardless of your reasoning, if you do go this route be sure to set reminders to keep tabs on the plan. Very often, folks get disconnected from their old account and pay less attention to its ongoing management. - You Take It With You To Your New Employer’s Plan
If your new employer’s 401(k) accepts the transfer of assets from a prior 401(k), you may want to consider moving to your new plan. Why?
Transferring old funds into your new employer’s 401(k) allows you to consolidate your assets, keep any creditor protections, and keep the funds accessible via the plan’s loan feature. But the major reason to transfer old to new would be to take advantage of the new plan’s better investment options. - Roll The Assets Into a Traditional IRA
Another choice is to roll assets over into a new or existing traditional IRA. Folks who do this typically do so for enhanced investment control and greater investing options than what was available via 401(k). Doing so, however, may provide less creditor protection and the inability to take a loan on the funds. - Cash Out The Account
There is always the option to simply take the funds. However, doing so will likely see a haircut on the funds. Withdrawing funds before the age of 59 1/2 will in all likelihood result in a 10% penalty (there are some exceptions allowing for penalty-free withdrawals but they are not common). Additionally, for a traditional 401(k) funded from pre-tax deductions, the employer may withhold 20% of the balance to prepay owed taxes. Nevermind the long-term loss that comes from not keeping the funds invested and growing.
An old 401(k) can be a diamond in the rough or it can be a wasted opportunity. The difference is what you do with it.