So, you’re thinking about leaving your job. That’s exciting! Maybe you’ve found a better opportunity, or maybe you’re just ready for a change. But before you hand in your notice, there’s something super important you need to understand: your 401(k). This is a retirement savings plan your employer might have offered, and it’s crucial to know what happens to that money when you decide to move on. Let’s break down what you need to know.
The Big Question: What Are Your Options?
The first thing you need to know is that you have choices! You don’t just automatically lose all that money you’ve worked so hard to save. You get to decide what happens to your 401(k) when you leave. Here’s a sentence that directly answers your question: When you quit, you have options for what to do with your 401(k) money, including leaving it with your old employer, rolling it over to a new retirement account, cashing it out, or transferring it to another plan. Let’s look at each one a little closer.
Leaving It Where It Is
One option is to simply leave your money in your old employer’s 401(k) plan. This might be a good choice if you are happy with how the plan is performing and don’t want to deal with the hassle of moving it. The plan must allow this, though. You’ll also need to stay on top of your account by getting in touch with the provider and letting them know you are no longer employed by them, and giving them your forwarding address.
However, there are some things to think about. When you leave your job, the people who administer the plan are no longer obligated to contact you. You are responsible for knowing what’s happening with your money. The plan’s investment options might also be limited compared to other plans. You may not like those options.
Also, your former employer can change its 401(k) plan. You might get a letter from the plan provider later telling you they’re changing things and that you need to act. This can be annoying. They may ask you to move your money out if your balance gets below a certain amount.
Here are some things to think about before you leave your money with your old employer:
- Are the investment options good?
- Are the fees reasonable?
- Do you want to keep track of two accounts?
- How big is your account?
Rolling It Over to an IRA
Another popular choice is to roll over your 401(k) money into an Individual Retirement Account (IRA). This is like moving your money to a new bank account that is specifically for retirement. You can open an IRA with a brokerage firm, bank, or other financial institution. It’s important to do a direct rollover, where the money goes straight from your old 401(k) to your new IRA, so you don’t have to pay taxes.
IRAs usually offer a wider variety of investment options than 401(k)s. This means you have more choices about where to put your money and potentially grow it faster. These options include stocks, bonds, mutual funds, and exchange-traded funds (ETFs). With more options, you can create an investment strategy that suits your personal goals and risk tolerance.
You can also choose between a Traditional IRA and a Roth IRA. With a Traditional IRA, the money goes in tax-deferred, meaning you don’t pay taxes on the money until you withdraw it in retirement. With a Roth IRA, you pay taxes on the money upfront, but your withdrawals in retirement are tax-free. Talk to a financial advisor about which one is right for you.
Here’s a quick comparison of Traditional and Roth IRAs:
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Taxes | Tax-deferred | Tax-free withdrawals in retirement |
| Tax Deduction | May be tax-deductible now | No tax deduction now |
Rolling It Over to Your New Employer’s Plan
If you get a new job with a 401(k) plan, you can often roll over your old 401(k) money into the new plan. This is another way to keep your money growing tax-deferred. This might make your life easier because it means you will only have one retirement account to watch.
Sometimes, the fees in the new plan are lower. Many plans have great choices for investment. This is really great when you can choose the exact investments you want, especially if they offer a wide variety. That variety allows you to spread out your risk and find what you need to keep your portfolio going strong.
Your new plan might have better investment options than your old one. Plus, it’s easier to keep track of one retirement account, especially since your new employer handles the administration. But be sure to check out all the fees and investment options before you move your money.
Here’s a simple step-by-step guide for rolling your old 401k into your new one:
- Contact your new 401k provider.
- Request a rollover form.
- Fill out the form.
- Your old 401k provider sends the money.
- Your new 401k provider invests it.
Cashing Out Your 401(k)
This is usually the least recommended option, but it’s still a possibility. If you cash out your 401(k) before you’re retirement age (usually 55 or 59 1/2), you’ll likely have to pay taxes on the money, plus a 10% penalty. This can seriously reduce the amount of money you end up with.
For example, if you cash out $10,000, you might lose around $3,000 to taxes and penalties. That’s a big hit! If you cash out now, you won’t have money for retirement. This means you could be in trouble later on. It’s always important to think about how much time you have to earn money again.
However, there are some very rare exceptions where you can withdraw without a penalty, like for specific medical expenses or if you become disabled. But, these are pretty specific situations. The government generally wants to make sure this money is used for retirement.
Here are some of the possible penalties for withdrawing early:
- Federal Income Tax: Your 401(k) withdrawal is considered income, so the federal government will take a cut.
- State Income Tax: Many states also have income taxes, so they’ll get a cut too.
- Early Withdrawal Penalty: This is usually 10% of the withdrawal amount if you’re under age 55 or 59 1/2.
So, there you have it! Knowing your options for your 401(k) when you quit is a super important part of financial planning. Choose the option that best fits your needs, and consider talking to a financial advisor to get personalized advice. Good luck with your new adventure!