When you leave your job, you should think a lot about your retirement. Here are the four main options that you have for your 401(k) retirement plan.
There are many reasons why you might want to leave your job. You might be a new parent who wants to spend time with their kids. Maybe you want to move to another company that offers a better pay, or maybe you are just tired with the current gig. You might also be an entrepreneur who wants to start a new business. In all this, maybe retirement is not the first thing on your mind. In this article, we will look at the options that you have for your retirement 401k plan.
In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.” —Peter Lynch
What is a 401K?
A 401(k) is the most popular retirement plans in the United States. It is a plan that allows your employer to invest in your retirement. Employees contribute to their 401k plans through automatic payroll withholding. At the same time, their employers can match their contributions. 401(k) plans are so popular in the United States. Indeed, a recent report found that the number of 401k millionaires was at an all-time high.
Options for 401(k) When You Leave Your Job
There are five key options for your 401(k) when you leave your job for any reason. In this part, we will look at some of these options.
Cash Out Your 401(k)
One of the first option you might have is to cash out your 401(k) after leaving your job. In fact, many people do this. A recent report found that a third of people usually cash out their 401(k) a year after leaving their job. Another small group of people usually cash out their 401(k) two to eight years after they change their jobs.
Cashing out your 401(k) is usually not a good thing. In fact, most financial advisors are usually against this idea. However, there are times when it is the only option. For example, if you have just been diagnosed with a chronic illness, cashing it could be an option.
Another thing. If you are leaving your job to start a business, you might cash the 401(k) and put the money in your new venture. Stories have been told of people who started their successful business this way.
If you decide to cash out your 401(k), your employer could withhold 20% of your balance to the Internal Revenue Service (IRS). You will also be required to pay a 10% early withdrawal fee.
Roll Over Your 401k into an IRA
Another option that you have when you leave your job is to rollover the 401(k) plan into an IRA. An IRA is an individual retirement account. This is an account that is not attached to your employer. For example, if you create a personal retirement account shortly after getting your job, that is known as an IRA. The benefit of an IRA is that tax is deferred. It also has more investment options than a 401(k).
Another option is to put the funds into a Roth IRA. A Roth IRA is a retirement account that encourages you to save money. The contributions to this IRA are not tax-deductable and they grow tax free. As such, the Roth IRA is an account that holds your investments. It is not an investment in itself.
Roll Over to Your New Employer 401(k)
If you are leaving your job to work for another company, we recommend that you rollover the current 401(k) to your employers’ plan. Before you leave your job, it is recommended that you confirm with your new employer whether they accept this. There are two primary options when you decide to do this.
- Direct rollover. In this, the person or company that administer your 401(k) transfers the money directly to your new 401(k) account.
- Indirect rollover. In this, you request the funds from your previous administrator and then you manually move the funds to the new plan. Your employer will withhold 20% for federal taxes. However, if you do the rollover within 60 days, this amount will be returned to you.
Leave Your 401(k) Where it Is
The easiest and most recommended method is to leave your funds where they are. In this, the funs will continue to grow, while deferring your taxes. It will assume that nothing changed. Still, you will likely not be able to make contributions when you leave. The disadvantage of this option is that some employers tend to charge higher fees when you are not part of their organization. Another disadvantage is that you might miss on new information from the employer.
You should always think about your retirement when you decide to leave your job. As such, you should work hard to ensure that you take care of your 401(k) plan. Doing otherwise could be disastrous. Therefore, you should look at these options and consider the best one when you decide to leave your job.
Crispus is a finance professional with more than a decade experience in the industry. Over the years, Crispus has written in-depth articles on leading platforms like CCN, Marketwatch, and Seeking Alpha. He also runs a Forex education and managed account company called WestEndFx.