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Your 4 Options with a 401(k) When You Leave a Job

Your 4 Options with a 401(k) When You Leave a Job

March 29, 2016

“What should I do with my 401(k) from my former employer?” This is a common question we hear often. You have 4 options: Cash Out, Keep it in the Old Company’s plan, Rollover your balance to your New Company’s plan, or Rollover your balance into an IRA.

Changing jobs can be stressful, so make sure you’re not worried about your 401(k) and retirement plan. Below is a summary to help you understand the advantages and disadvantages of your options.

  1. Cash out from the Old Company’s 401(k) plan: When you separate from an employer you can choose to liquidate your 401(k) retirement account. Withdrawing the funds from a 401(k) is generally considered a poor option in most circumstances.
  2. Leave your account balance in your Old Company’s 401(k) plan: Generally an employer must allow you to do this if the account balance is over $5000. It’s always smart to speak with the appropriate department to get the details regarding the Company’s policy. Look for fees and expenses that reduce your retirement assets.
  3.  Rollover your 401(k) balance to your New Company’s plan: Not all companies will allow this, so check your New Company’s retirement plan policy. If it’s possible, many people still avoid this choice because it can be complicated and involves too many factors such as: 401(k) rollover waiting periods, complex 401(k) verifications, lengthy processing time-frame and there are potential triggers for fees/taxes.
  4. Roll your balance to an IRA: For most people this is considered the best choice if you have a 401(k) from a previous employer. With this option you are moving money currently in a tax- advantage 401(k) account that your employer controls into a tax-advantage account that you will control. For most people rolling your account balance to an IRA is considered the best choice.

      Benefits of IRA Rollover for 401(k):

  •  Potentially Lower Fees: The fees on some IRAs may be lower than the 401(k) fees. Company 401(k) plans often have more administrative and overhead expenses. This can add up over time and cost you money.
  •  More Investing Options: With an IRA, it’s likely you will have the freedom to invest in lots of stocks, bonds, mutual funds, ETFs. This means you will have more choices because a 401(k) account will only provide investment options determined by your employer or plan administrator.
  •  Consolidated Simplicity: This benefit is especially valuable if you have more than one 401(k) account from previous employers. It’s easier to manage your portfolio if you roll all of your retirement assets into one account. Generally speaking, you can manage investments more effectively with a consolidated portfolio because you won’t need to monitor different accounts with different financial services providers.


      Disadvantages of Cashing Out your 401(k):

  • Retirement funds like your 401(k) Plan are subject to income tax at the normal income-tax rate. The Federal and State income tax is due immediately when you cash out.
  • People under the age of 59 ½ years old are subject to a 10% Federal tax penalty if they cash out 401(k) Plans. This 10% penalty is in addition to the Federal and State income tax.
  • You will be undermining the hard work, time and money that you’ve invested in the 401(k) as part of your retirement plan. It may be difficult to replace this investment before retirement age.

The average person will have 12 to 15 jobs in a lifetime… So it’s possible you’ll need to make decisions about a 401(k) when you leave a job during your lifetime. If you have a 401k from a former employer, but haven’t made changes to the account, it can’t hurt to investigate your IRA Rollover option now.

For more information go to: Titan Financial & Insurance Services

Sources:, NerdWallet, U.S. Department of Labor


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