When you switch jobs, you have several options for your 401(k) account from your previous employer. You can leave it there, roll it over to your new employer’s plan, or cash it out. Leaving it there is the simplest option, but you may miss out on investment options and could incur fees. Rolling it over allows you to consolidate your retirement savings and potentially take advantage of better investment choices. Cashing out gives you immediate access to the funds, but it may result in taxes and penalties. Consider factors such as investment goals, fees, and tax implications to make the best decision for your situation.
What to Do With 401k When You Change
When you change jobs, you may wonder what to do with your 401(k) plan. There are several options available to you, and the best choice depends on your specific situation.
Roll Over to New 401(k) Plan
One option is to roll over your 401(k) balance into your new employer’s plan. This is a simple and convenient way to keep your money in a tax-advantaged account. However, there are a few things to keep in mind when rolling over your 401(k):
• You may have to pay taxes on the money you roll over if you are not yet 59½.
• You may be charged a fee for rolling over your 401(k).
• You may lose some investment options if you roll over your 401(k) into a new plan.
If you are considering rolling over your 401(k), it is important to compare the terms of your old and new plans. You may be able to find a new plan with lower fees and better investment options, which could save you money in the long run.
In addition to rolling over your 401(k), you may also have the option to:
1. Cash out your 401(k)
2. Leave your 401(k) in your old employer’s plan
3. Convert your 401(k) to an IRA
| Option | Pros | Cons |
|---|---|---|
| Roll over to new 401(k) | • Keeps your money in a tax-advantaged account • Simple and convenient |
• May have to pay taxes on the money you roll over if you are not yet 59½ • May be charged a fee for rolling over your 401(k) • May lose some investment options if you roll over your 401(k) into a new plan |
| Do a full or partial cash out | • Get immediate access to your money • Avoid paying taxes on the money you roll over if you are not yet 59½ |
• May have to pay a 10% early-withdrawal penalty if you are not yet 59½ • May have to pay taxes on the money you cash out, depending on your age • May lose the opportunity for tax-free growth |
| Leave your 401(k) in your old employer’s plan | • No fees or taxes involved • Easy to manage |
• May not have access to the same investment options as you would in a new plan • May have to pay taxes on the money if you leave it in the plan after you turn 72 |
| Convert your 401(k) to an IRA | • More investment options • More control over your money |
• May have to pay taxes on the money you convert, depending on your age • May have to pay fees to manage your IRA |
Withdraw and Pay Taxes and Penalties
Withdrawing money from your 401(k) before age 59½ generally triggers income tax and a 10% early withdrawal penalty. However, there are exceptions to this rule, such as if you are disabled, have certain medical expenses, or use the funds to buy your first home.
If you do withdraw money from your 401(k), the amount withdrawn will be subject to income tax at your current rate. The 10% early withdrawal penalty is applied to the amount withdrawn minus any amount that is rolled over to another qualified retirement account.
Here is a table summarizing the tax and penalty implications of withdrawing money from your 401(k) before age 59½:
| Withdrawal amount | Income tax | Early withdrawal penalty |
|---|---|---|
| Up to $10,000 | 10% | 10% |
| $10,000 to $50,000 | 15% | 10% |
| $50,000 to $100,000 | 20% | 10% |
| Over $100,000 | 25% | 10% |
Cash Out and Pay Taxes and Penalties
Cashing out your 401(k) when you change jobs may seem like a tempting way to get quick access to your retirement savings. However, it’s crucial to understand the potential consequences before making this decision. Cashing out your 401(k) involves withdrawing the funds before retirement age (59½). This premature withdrawal triggers two main penalties:
- Taxes: Withdrawals from traditional 401(k) plans are subject to ordinary income tax at your current tax rate. If you’ve borrowed against your 401(k) and haven’t repaid the loan, the unpaid amount is also considered a taxable withdrawal.
- 10% early withdrawal penalty: This penalty is applied to withdrawals taken before age 59½ (55½ for certain exceptions). The penalty is 10% of the amount withdrawn and is added to your tax bill.
To avoid these penalties, consider if there are other financial options available to you that could provide access to funds. You could discuss a loan against your 401(k) with your employer, explore hardship withdrawals, or look at options for rolling over the funds to your new 401(k) plan or an Individual Retirement Account (IRA).
Leave in Former Employer’s Plan
If your former employer allows it, you may consider leaving your 401(k) in their plan. This can be a good option if you are satisfied with the investment options and fees in the plan and you do not need the money immediately.
There are a few things to keep in mind if you decide to leave your 401(k) in your former employer’s plan:
- You will need to contact your former employer’s plan administrator to request a distribution form.
- You will need to decide if you want to take a lump-sum distribution or roll over the money to another account.
- If you take a lump-sum distribution, you will be subject to income tax and may also be subject to a 10% early withdrawal penalty if you are under age 59½.
- If you roll over the money to another account, you will avoid paying taxes and penalties, but you will need to find a new account that meets your needs.
| Option | Pros | Cons |
|---|---|---|
| Leave in former employer’s plan |
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| Roll over to a new account |
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Alright folks, that’s all for now on what to do with your 401(k) when you switch jobs. I hope you found this article helpful. Remember, it’s important to consult with a financial advisor to determine the best course of action for your specific situation. Thanks for reading, and be sure to check back for more personal finance tips and tricks in the future. Take care!