Job Transition? Here’s What You Can Do with Your 401(k)

One common challenge for people changing jobs is deciding what to do with their 401(k). Here are the four main options to consider:

Option 1: Keep It with Your Former Employer

You can leave your 401(k) where it is, but keep in mind that if your balance is below a certain threshold, your former employer might distribute it to you. Some benefits of keeping it include access to low-cost investments or creditor protections that may not be available elsewhere. However, you may lose track of your account over time or neglect its management.

Option 2: Transfer It to Your New Employer’s 401(k)

If your new employer allows it, you could transfer your 401(k) to their plan. This offers the convenience of having all your retirement savings in one place, plus you keep creditor protections and possibly the ability to borrow from your account if needed. If the new plan has strong investment options, this can be a smart move.

Option 3: Roll It Over to a Traditional IRA

Another choice is to roll over your 401(k) into a traditional IRA, which might offer a broader range of investment options. However, you may lose some of the creditor protections and access to loan features available in a 401(k). Take your time with this decision and consider seeking professional guidance if you have questions.

Option 4: Cash Out

Cashing out your 401(k) might seem tempting, but it comes with significant tax penalties if you’re under 59½, including a 10% early withdrawal fee and ordinary income tax. Plus, you miss out on potential long-term growth. For example, cashing out $10,000 now could mean losing out on nearly $100,000 over 30 years if that money had stayed invested with an 8% annual return.

Think carefully about your decision and how it aligns with your financial goals.