If you’ve left your former job for a new employment opportunity, you’re likely leaving behind a substantial balance in your employer-run retirement account. You have multiple options available to you when deciding how to handle those funds, so make sure you consider each one to find the solution that’s best for you:
Option 1: Leave the account as it is
Even though you’re no longer employed by the company that owns your 401(k) plan, that doesn’t mean you have to close out or forfeit the balance. You may be able to still let the balance of your contributions continue growing over time even though you aren’t contributing any additional funds from your paycheck.
“If allowed, you could keep the money in your former employer's plan,” points out Melissa Phipps of The Balance. “Some employers will allow that if you have a certain balance, generally $5,000 or more.”
The biggest benefit of this solution is that it requires the least effort on your part. Just make sure you assess how beneficial the plan has been for you regarding fees, investment freedom, and account management tools.
Option 2: Cash out
This option is called a lump sum distribution. You can cash out your account in a single payment, though you’ll have to pay taxes on the amount and may face penalties for early disbursement.
While cashing out does offer the most immediate payoff for you, it also inhibits your retirement savings in the long run. “The lost opportunity for growth through compounding can never be recaptured, and it can be particularly damaging for older workers with little time to replenish their nest egg,” warns Lisa Smith of Investopedia.
But, Smith also points out, this may be a sensible solution for you if you need the money to cover bills while you’re looking for a new job.
Option 3: Roll into your new plan
If you’ve established a new 401(k) account with your new employer — which you should if it’s offered — you can close out your old account and transfer the balance to your new retirement account, usually without any penalties.
In addition to consolidating your retirement accounts to make them easier to track and disburse when you retire, this solution may benefit you if your new employer’s plan involves lower maintenance fees, offers better investment options, etc.
If you’re unsure how to do this, Michelle Fox of CNBC recommends you, “speak to your new human resources department to make sure your new plan accepts rollovers. Then, you’ll have to fill out paperwork form your new plan, as well as a transfer form from your old employer.”
Option 4: Move to an IRA
If you’d prefer to have the most autonomy over your retirement savings, you can ask your former employer to transfer your balance to an individual retirement account where it isn’t linked to your employment status. You can roll your savings into a traditional IRA or a Roth IRA, though the latter will require you to pay taxes to covert the sum.
This is especially a good option if you’re self-employed or unemployed for the foreseeable future — but have enough cash in your emergency fund to hold you over until you start receiving paychecks again. “If you tend to move from job to job as you climb the career ladder, a rollover IRA is a great option,” recommends Phipps.
Whichever option you select, make sure you talk with your former employer’s human resources department to ensure you’re following the proper procedure to avoid being penalized with preventable fees.