According to the US Bureau of Labor Statistics, the average American worker only stays at the same job for 4.6 years. Over the course of your career it is likely you’ll change jobs at least a handful of times, and each time you do you’ll need to decide what you want to do with your 401(k) retirement plan.
You have four options:
Take a lump sum
This is almost always a bad idea. First of all, you’ll miss out on any potential gains you could have earned by leaving the money alone and letting it grow. You’ll never have a change to accumulate significant wealth if you just cash out and start from scratch every five years.
Also, you have to pay taxes on distributions from your 401(k) and that could significantly increase your tax bill for the year. For example, if your taxable income would normally be $60,000 and you make a withdrawal for $15,000 you’ll be taxed on the full $75,000. Even worse, if you’re under 59 1/2 you will be subject to an additional penalty tax of ten percent.
Generally speaking, you shouldn’t take money out of your 401(k) plan unless you have a desperate need.
Leave it in your old company’s plan
Many people do this by default simply because they’re too lazy to take action and it is easier to just leave the money where it is. But that may not be the best option.
Some 401(k) plans come with hefty fees and you may be able to find a less expensive option. Check out Brightscope.com to see how your company’s 401(k) plan compares to industry averages.
If your balance is under $5,000, you might not even be allowed to keep it at your old employer’s plan. They could force you to take a distribution to reduce their own administrative costs.
Roll it into your new employer’s plan
If you decide to take your 401(k) balance and roll it into another qualified retirement plan with your new employer, you won’t have to pay any taxes on the distribution. You would get a check made out to Your New 401(k) Provider for the benefit of Your Name.
This is a great option because you get to open your new 401(k) account with a head start instead of beginning at zero. Your money can continue to grow tax-deferred in the new plan, plus you can take advantage of any company contributions offered by your employer.
Roll in into IRA
Opening an IRA and rolling your 401(k) into it is another smart option. Once again your money will be able to grow tax-deferred and IRAs typically have many more investment options than a 401(k) would.
And if you do indeed switch jobs every few years you can roll all of your old 401(k) accounts into just one IRA so you can better manage your money. This is much better than having your retirement savings spread out among a bunch of different 401(k) accounts with different employers With everything in one account, it will be easier for you to keep tabs on everything and you’ll be less likely to miss something or make a mistake. If you are interested in rolling your 401(k)s into an IRA, check out Scottrade, Betterment, or Motif Investing for options.
Not Sure How to Start Investing?
I opened up my first investment account back in 2012 after paying off a lot of debt. That account was with Betterment. Since then, I haven’t looked back. I love the simplicity and ease of use they provide. I think their system is good for any type of investor. If you want to get into investing, check out Betterment.