For whatever reason you leave a job, whether you resigned, retired, or got laid off, you shoudl make a clear choice on what to do with your 401k. There are typically four options. If you are over 59 1/2, you have a fifith option as well.
The options for your 401k after you leave your job, whether you resigned, got laid off, or retired are:
- Leave it where it is.
- If you change companies, you can rollover your retirement plan into your new employer’s 401(k)
- You can cash it out.
- If you leave a company, you roll your retirement plan into an individual retirement account (IRA).
- If you retire, you can start taking distributions starting at age 59½ and must start making minimum withdrawals at age 72.
Here is a summary:
- Leave it where it is
If you like your plan options, you can leave it where it is. Typically though, your options for investing are limited, there may be higher annual fees than if you find a different account, and the options may not be making as high returns as an index fund. There is not time limit to move these funds. In fact, I have one account still with the original employer although I haven’t worked there in about 10 years.
2. Rollover your retirement plan into your new employer’s 401(k)
You can rollover to the new employer’s 401 k. Once again, check for investing options, annual or maintenance fees, and the returns on your money. If you roll these together, it is one less account to manage but certainly not worth it if the quality of the choices of funds and stocks are lower.
3. Cash it out
You can cash it out and take the money. However, you will have to pay taxes and penalties, so this is the LEAST preferred option. Penalites for early withdrawal are 10%, plus about 10- 20% in taxes. So, you are automatically lsing a bug chunk of the money that you saved. Don’t be tempted to take the few hundred, or thousands, of dollars for a vacation or luxury spend. Just roll it into a retirement account.
4. Roll it to an individual retirement account (IRA)
If you leave a company, you roll your retirement plan into an individual retirement account (IRA). You can choose several types of accounts but the typical account is a brokerage account, which may be managed by a financial advisor or self-directed.
5. If you are 59 ½ and retire, you can take distributions
If you retire, you can start taking distributions starting at age 59½ and must start making minimum withdrawals at age 72. Of course, if you don’t need the money yet, you can certainly continue to keep it in the account until age 72.
If you have specific questions about your personal situation, please reach out to a qualified person, such as an accountant, tax advisor, or financial advisor, to help you. Be sure to like the video, subscribe to our YouTube channel, and join us at Facebook.