Whether you're jumping ship for a higher salary or a better title, it's not unusual to switch jobs at several points throughout your career. But while adjusting to a new job is a process in its own right, one aspect you'll need to address early on is your old 401(k) -- namely, what to do with it once the time comes to move on. Here are a few options to consider.
1. You can leave your money in place
Contrary to what you may have been led to believe, you don't always have to move your money out of an old 401(k) just because you're no longer employed by the company sponsoring that plan. Though some plans require a minimum balance to keep your funds where they are, if you meet that requirement, and you're happy with your plan and investment mix, it may be beneficial to leave that money untouched.
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Keep in mind, however, that there's a downside to keeping your money in an old plan. First, you'll no longer have the option to contribute to that account going forward, which means that if you open another account through your new employer, you'll have multiple accounts to keep track of. Furthermore, there's always the chance that your old company will switch 401(k) providers, in which case you may not receive much support if that change negatively impacts you in any way. At a basic level, for example, you may not get notified of a need to change your login or password, at which point you'll have a hassle on your hands.
2. You can roll your old 401(k) into a new one
Assuming your new employer offers a 401(k), another option is to roll your old account into your new plan. This way, your retirement savings will all be consolidated into a single place, and you'll have an easier time managing that money.
Now if you do go this route, you'll be limited to the investment choices offered by your new 401(k) -- and the fees that come along with them. That's why it pays to review your new plan thoroughly before pulling the trigger and rolling your old plan over.
3. You can roll your money into an IRA
If you don't like the investment choices offered by your new 401(k) plan, or aren't thrilled with the fees, another option is to roll that money into an IRA. You'll enjoy the same tax-advantaged treatment of a 401(k), but you'll typically get far more choices for investing your money. This can not only help ensure that your investments align with your strategy and goals, but help you avoid wasting money on hefty fees.
If you choose to roll your old 401(k) into an IRA, you have the option to do so directly or indirectly. With the latter, you'll get a check for your account balance, and you'll be responsible for completing the rollover to your new account within 60 days. Fail to do so, and you'll face taxes on your distribution plus a 10% early withdrawal penalty on that sum, assuming you're not yet 59-1/2. Another thing -- your plan administrator will typically be required to withhold 20% of your account value for taxes, but you'll still need to deposit your entire original balance into your new account to avoid a penalty. And though you'll get that money back on your taxes, it's still a relative pain.
That's why it generally pays to move funds from an old 401(k) to an IRA via a direct rollover. In a direct rollover, the money from your old plan is transferred directly to your new one. Because you never take possession of that money, you don't run the risks associated with an indirect rollover. Rather, your money will be transferred seamlessly, and once it's in your new account, you can invest it as you see fit.
There are many good reasons to change jobs, but if you do, don't make the mistake of neglecting your old 401(k). You worked hard to sock that money away for the future, so be sure to keep it on your radar as you prepare for your upcoming career move.
