What Do I Do With My 401(k) When Leaving My Job?

Retirement?  Onto the next great adventure? Kicked to the curb?

Leaving your job can be filled with emotions no matter the reason. You’ve worked hard and diligently contributed to your 401(k). The next move you make can have a significant impact on your retirement success. It's incredibly important to know and educate yourself on your retirement options.

Should I cash out my 401(k) plan?

No, do not cash out your 401(k) before speaking with a financial advisor.  That's a brash move if you don't know what you're doing.  Get the facts and make an informed decision.

After you leave your employer, you may have the option to cash out your 401(k) plan and receive a check for the balance. Although this may be an intriguing option, you should consider the consequences.

When you withdraw money out of your 401(k) plan, it's taxed as ordinary income. It’s like earning a paycheck today. Additionally, if you are not 59 ½ you are subject to an additional 10% early withdrawal penalty.

For example, say you are in the 28% tax bracket, under the age of 59 1/2 and withdraw $150,000 from your retirement plan. You may end up paying $42,000 in taxes and $15,000 penalty for early withdrawal. The $150,000 withdrawal quickly dwindles to $93,000.

Should I Rollover my 401(k) into an IRA?

One of the great benefits of participating in a 401(k) is that it allows for the balance to grow tax deferred. By rolling over a 401(k) into an IRA, you are still able to maintain the potential for growth and tax deferral.

401(k) plans typically offer a limited amount of investment options compared to IRAs.  The reason for the limited amount of investment options inside a 401(k) usually comes down to plan costs.

Rolling your 401(k) into an IRA may offer a competitive and wider array of investment options. While this may not always be true, it's worth reviewing the costs and funds available in both plans.  A financial advisor can help you compare the funds inside your 401(k) plan with those inside of an IRA.

It's also important to consider the legal protections and differences of 401(k) plans and IRAs.

Should I keep my 401(k) Plan after termination of employment?

There are benefits to keeping your 401(k) and not rolling it into another retirement plan. Not all retirement plans allow you to leave your plan in place but in some cases it's possible. If you can, it's worth knowing the facts.

You can't contribute or receive the matching contributions after your employment terminates. You may still be able to control your investment options and have access to a professional for educational and support purposes.

401(k)s may have more creditor protection than IRA’s depending on the state you live. Creditor protection may be particularly useful if you are in a field where there is an increased risk of litigation such as with doctors or lawyers.

We're not attorneys so be sure to speak with one before making any legal decisions.

You can also speak with the human resources department and the 401(k) provider on your specific plan features and benefits.

Should I Rollover my old 401(k) plan into the new 401(k) plan?

Rolling over your 401(k) into a new 401(k) plan may be an option. It's going to depend on your new 401(k) plan documents. Your old plan will most likely have the required paperwork to complete the transactions.

Before you take action, speak with your new 401(k) plan first to ensure they will accept a rollover contribution.

Rolling into a new 401(k) continues tax-deferral and simplified your financial footprint. However, you'll only have access to the new 401(k) funds so consider the plan investment options as well.