Whenever you change jobs, there are several details that need tending -- for example, ensuring continued health coverage, packing your belongings, and cleaning your computer of non-job-related and embarrassing files and Web addresses.
Add to that list another important task: Taking care of the assets in your former employer's retirement plan. You have several choices:
1. Leave the money: The old plan might allow you to continue to participate. It's still your money, though you will lose any employee benefits such as matched contributions. Take this option only if you are very pleased with the investment choices and low fees offered in the plan.
2. Take the money and go on vacation: You could just ask for a check and go see the castles of Europe. However, the withdrawal will count as ordinary income and will be taxed as such. And, if you're younger than 59 1/2, you'll pay a 10% penalty. So if you had $10,000 in your 401(k), you might have as little as $6,000 left after taxes and penalties. Plus, you've compromised your retirement nest egg.
3. Transfer the money to your new employer's plan: This may simplify things since it keeps you from having a bunch of retirement accounts. But that simplicity isn't worth it if the choices in the new plan are mediocre (as are most of the choices in employer-sponsored retirement plans) and the fees are excessive.
4. Transfer the money to an IRA: This is the Fool's favorite. With the money in an IRA, you will have much more flexibility. Instead of being limited to the handful of ho-hum mutual funds offered in most retirement plans, an IRA with a discount broker would allow you to buy stocks, bonds, certificates of deposit, real estate investment trusts (REITs), Treasury securities, exchange-traded funds, index funds, and thousands of other funds.
If you choose either of the "transfer" options, ask your new plan administrator or IRA provider for information on how to get the money from the old account. You want to avoid having a check sent to you directly. If this happens, you'll have just 60 days to get it to a new account. Plus, 20% of the money will have been withheld by your old plan (per IRS rules). You'll have to come up with that 20% when you deposit the money in your new account, and you'll receive a tax credit for that amount when you file your taxes.
Not sure how to choose or open an IRA? Then read our 60-Second Guide.
