If you’re lucky enough to have a 401(k), it’s a loose end to tie up when you leave your job.
While it can be tempting to grab the money and run, that should be the last resort for almost all retirement savers. If you are under age 59½, you will owe income taxes on the entire balance.
If you are under 55, the IRS may also charge you a penalty equal to 10% of the amount. And collecting his retirement would leave him without the funds he will need in his golden years.
Consider which of these strategies makes the most sense for your situation.
Keep your 401(k) with your former employer
When you get a new job and a 401(k), your old plan may offer better investment options than your new plan. That’s an argument for leaving it right where it is.
Most companies allow former employees to keep their 401(k) accounts, even after accepting a new job. Here are some caveats to keep in mind:
- If your 401(k) balance is less than $1,000, the company has the option to proactively close your account and write you a check for the amount.
- If your 401(k) balance is between $1,000 and $5,000, the company may choose to set up an individual retirement account (IRA) for you and transfer your old 401(k) balance into the account.
Transfer your old 401(k) balance to your new employer’s plan
If you’ve found a new job that offers a 401(k), ask Human Resources if your new plan accepts rollovers from another 401(k).
Not all employers allow 401(k) rollovers, and some companies require new employees to work for a certain period of time before they can enroll in the 401(k) plan.
Once you get the green light:
- Ask the administrator of your old 401(k) plan to deposit your balance directly into your new 401(k) account. A direct transfer prevents you from owing taxes or missing deadlines in the rollover process.
- If direct transfers aren’t an option, ask your former 401(k) administrator to write you a check for the value of your account balance. You must deposit the funds into your new 401(k) plan within 60 days, or you’ll owe income taxes on the full balance and may even face a 10% IRS penalty for taking an early withdrawal.
Transfer your old 401(k) balance to an IRA
Maybe your new employer doesn’t offer a 401(k) plan, or maybe you want to start your own business. Either way, rolling over your old 401(k) balance into an IRA is his go-to strategy.
Check out our list of the best online brokerage accounts to choose a new IRA provider, or consider an auto advisor to manage your retirement funds for you.