FINANCIAL FOCUS: What to do with a 401(k) after leaving a job

Joe Faulk

Joe Faulk

Published: Thursday, January 9, 2014 at 03:50 PM.

In the past, many people stayed at one job, or at least one company, for almost their entire working lives. When they retired, they could typically count on a pension, the value of which was based on their years of service and earnings.

Today, workers can expect to hold several jobs in their lifetime, and to a great extent, pensions have been replaced by 401(k) plans, which place much of the funding responsibility on employees.

So, assuming you will change jobs at some point, and you do have a 401(k), what should you do with it?

Here are your basic choices:

Cash out your plan. If you do this, your company will likely pay you 80 percent of your account value, withholding the rest for federal taxes. And if you’re younger than age 59½, you may be slapped with a 10 percent IRS tax penalty. Even worse, you’ll have lost a key source of your retirement income. Still, if you are leaving your employer involuntarily, and you need the money, cashing out your 401(k) is an option you may need to consider.

Keep the money in your company’s plan. When you leave a company, your employer may allow you to keep your money in your existing 401(k). You may want to choose this route if you like the investment choices available in your plan. However, you might be caught by surprise if the company decides to change investment options. Furthermore, some employers may charge former employees fees to maintain their 401(k) plans. 

Move the money into your new employer’s plan. If your new employer has a 401(k) and allows transfers, you could roll the money from your old plan into the new one. This might be an attractive option if you like the investment options in your new employer’s plan.



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