Changing jobs can be an exciting yet daunting experience. One of the critical aspects to consider during this transition is what to do with your 401(k) retirement savings. There is no “right” option, but the idea is to educate yourself on what makes the most sense for your personal situation:
Leave Your 401(k) with Your Former Employer
One option is to leave your 401(k) account with your former employer. This can be a convenient choice if you are satisfied with the investment options and fees associated with your current plan. However, there are a few things to consider. You may have limited access to manage your account, and some employers may charge higher fees for former employees, and you won’t be able to make new contributions. Another consideration is that your former employer may change the plan’s investment options or fees, which could impact your planning.
Roll Over Your 401(k) to Your New Employer’s Plan
If your new employer offers a 401(k) plan, you might consider rolling over your old 401(k) into the new plan. Having all your retirement savings in one place makes it easier to manage and track your investments. Doing this also avoids taxes and any early withdrawal penalties. You will want to do your research and compare the investment options and fees of your new employer’s plan with your old plan to ensure it’s a good fit.
Roll Over Your 401(k) to an IRA
Another option is to roll over your 401(k) into an Individual Retirement Account (IRA). Some 401(k) plans have a limited number of investment options, while IRAs typically offer more investment choices. Moving one 401k plan to another, rolling over to an IRA avoids taxes and penalties. IRAs can be self-directed, or professionally managed by a financial advisor.
Cash Out Your 401(k)
Cashing out your 401(k) should generally be considered a last resort due to the significant financial drawbacks. You’ll owe income taxes on the withdrawn amount, and if you’re under 59½, you’ll also face a 10% early withdrawal penalty. Cashing out reduces your retirement savings, which can impact your financial security in the future.
Changing jobs is a significant life event that requires careful consideration of your 401(k) options. By understanding the pros and cons of each option, and considering your individual financial situation, you can make an informed decision that supports your long-term retirement goals. Whether you choose to leave your 401(k) with your former employer, roll it over to a new plan, or cash it out, taking the time to evaluate your options will help ensure a secure financial future. It can help to run different scenarios by someone else, so please reach out to Bickling Financial Services if you’d like to discuss your specific situation.
Patrick Hanlon is a Certified Financial Planner CFP® at Bickling Financial Services and has been in the financial services industry for 15 years. Patrick can be reached at (781) 862-9792 and patrick.hanlon@bickling.com.
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