Getting a new job is stressful. You have to familiarize yourself with an entirely new company and learn entirely new job functions and processes. And when it comes to tying up any loose ends from your old job, deciding how to handle your old employer-sponsored 401(k) is probably the last thing on your mind.
Itâ€™s easy to procrastinate making decisions about your retirement savings, but that doesnâ€™t mean you should. Hereâ€™s what to do with your 401(k) after leaving a job.
If you have a 401(k) from an old job, youâ€™ve got a few options to work with. Hereâ€™s what to consider.
Unless youâ€™re 59 and a half years old or have a financial hardship, donâ€™t cash out on your old 401(k). If you withdraw your 401(k) before youâ€™ve reached the age requirement, youâ€™ll be faced with a 10% tax penalty.
Cashing out your 401(k) means youâ€™re stopping the investment growth before it fully matures, which can hurt your retirement savings. Instead, leave your money alone for as long as possible. Required minimum distributions (RMD) for traditional 401(k)s start at 70 and a half years of age. While itâ€™s possible to take money out before this time without facing a penalty, itâ€™s often beneficial to wait as long as possible before you start taking money out.
Although it can be easy to leave behind your old 401(k), it can hurt how much you collect later on. If you leave your old 401(k) alone, fees can still build up even if youâ€™re not contributing. That means less money for you by the time you retire.
While leaving your money in your old 401(k) is an option, your previous company is responsible for it. If your old employer determines they donâ€™t want to manage it, you usually have 60 days to move it somewhere else. If you donâ€™t move the funds to another retirement account, they could send the money directly to you, which means you could face early withdrawal and tax penalties.
Before you leave your old job, discuss your options with the HR department or 401(k) administrator to see what requirements you may need to follow.
If your new employer offers a 401(k), check out the terms and rates and compare them against your old one. Youâ€™ll want to consider administrative fees, the number of investment options available and how much â€” if any â€” your employer will match.
If your new 401(k) offers competitive rates and matches contributions, it may be worth moving your old one over. Take the time to manage the rollover from your former employer to your new one. It might seem like a hassle, but the money youâ€™ll be earning is worth your time.
If your new company doesnâ€™t offer a great 401(k) plan â€” or doesnâ€™t offer one at all â€” consider opening up an Individual Retirement Account (IRA) and rolling over your funds. Whether you open a traditional or Roth IRA, you can roll over your old 401(k) into an independent investment account separate from your employer.
If youâ€™re unemployed or now work for yourself, rolling your 401(k) into an IRA is a good option to ensure your retirement money has a home until you need it.
In general, the sooner you perform the rollover, the better.
If your old employer chooses not to consider managing your account, youâ€™ll typically have 60 days to move your old 401(k) to its new home. If you donâ€™t move it within those 60 days, the government will classify the funds as taxable income, placing a 10% tax penalty on the early distributions.
There are two rollover options to consider:
Leaving an old job to start a new one can be both exciting and challenging. Youâ€™ll likely receive paperwork from HR upon your departure reminding you of your 401(k) plan options. Youâ€™ll want to be sure to stay on top of your plan and its ownership so you donâ€™t lose it or forget about it â€” leaving money behind.