You Left Your Job, But Should You Leave Behind Your 401k Retirement Account?

Leaving a job can be a stressful time. Whether you left for a better position, decided to raise a family, retired or were laid-off, parting from an employer creates a number of important decisions. The decision on what to do with your 401(k) account can have a significant financial impact, yet many people choose to ignore it. Just leaving it behind may not be the best choice.

Four Options

Depending on the specifics of your employer's plan, you typically have four options:

1)Leave the account in your former employer's program
2)Move the account to your new employer's 401(k) plan
3)Cash out the account
4)Rollover the account into an IRA

Your best option depends both on your personal financial situation and on the specifics of your old employer's plan, and potentially, on details of your new employer's 401(k) plan as well. The pros and cons listed below should be considered general guidance.

1. Leave Account in Former Employer's Plan - do nothing. Keep account as-is.

Pros

  • Easy solution - just leave things the way they are
  • Maintains tax-differed status of investments; avoid early withdrawal penalties

    Cons

  • Plan may restrict investment choices and number of annual exchanges between funds
  • Some plans have a minimum balance to remain in plan (e.g., $5,000)
  • Plan and fund level expenses may be significantly higher than available outside 401(k) plan
  • Additional contributions are not allowed

    2. Move Account to New Employer's Plan - transfer funds from old employer's plan to new employer's plan.

    Pros

  • Keeps your retirement plan assets together in a single plan
  • Maintains tax-differed status of investments; avoid early withdrawal penalties

    Cons

  • Plan may restrict investment choices and number of annual exchanges between funds
  • Plan and fund level expenses may be significantly higher than available outside 401(k) plan

    3. Cash Out the Account - remove funds from shelter of tax-deferred retirement account. For example, withdraw account balance to pay down debt or fund a major purchase.

    Pros

  • Immediate access to assets in plan

    Cons

  • Lose benefit of tax-differed growth
  • Distributions are taxable income and, if under 59 ½, may be subjected to early withdrawal penalty of 10%
  • Any distribution is subject to 20% Federal mandatory withholding
  • By spending your "retirement" money now, you face the risk of not meeting your retirement savings goals

    4. Rollover Account into an IRA - a "rollover" refers to transferring a tax-deferred retirement account from one provider to another. For example, transferring a 401k account from a prior employer to a IRA Rollover account at a brokerage firm. If done properly, this is a non-taxable event and maintains the tax deferred benefit of these plans.

    Pros

  • Potential to combine existing IRA assets together in a single account
  • Maintains tax-differed status of investments; avoid early withdrawal penalties
  • Access to broad array of investment choices - including funds with significantly lower expenses
  • Maintain ability to make withdrawals at any time

    Cons

  • No ability to borrow against assets in account
    • Author(s): 

    Steven Geri

    Author Info: 

    Steven Geri, CFA is the founder of InvestSimply LLC ( www.investsimply.com ). We make it simple to invest soundly. InvestSimply offers real people easy access to sophisticated investment portfolios. Our website provides an Investor Profile Survey -- answer 7 questions and instantly see what might be the right portfolio for you.

    Source: 
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