When you leave your current employer, it’s important to consider what to do with your 401(k) retirement savings. Here are four options to consider:
1. Stay in the Same 401(k)
If the specific balance in your 401(k) is less than $5000, it’s important to note that your old employer might not allow you to stay in the same 401(k) plan. However, if you meet the requirements, staying in your current 401(k) can be an option that has the following benefits:
Benefits:
- Convenience of keeping your retirement savings in one account.
- Familiarity with the investment options and platform.
- Avoiding the need to make immediate decisions regarding your retirement funds.
But on the other hand, you might have to deal with yet another 401(k) account issue. Over the years, we have found many of our customers have come to look for their long forgotten 401(k) account(s). This is definitely something you should avoid.
2. Rollover to an IRA (Individual Retirement Account)
Rolling over your 401(k) to an IRA offers several advantages that may benefit your retirement strategy.
Benefits:
- Consolidation: By transferring your 401(k) funds to an IRA, you can consolidate multiple retirement accounts into a single account for easier management.
- Better Investment Options: IRAs typically offer a broader range of investment options, allowing you to tailor your portfolio to your specific goals and risk tolerance.
- Lower Fees: You completely avoid to pay employer’s sponsored 401(k) administration and other fees. Furthermore, you can choose ultra low cost index funds to invest, something your old 401(k) plan might lack of.
Considerations:
- Research and select a reputable financial institution or brokerage firm to open your IRA.
- Understand the investment options and associated fees before making the transfer.
- In rare situations, you should be aware that 401(k) accounts provide better legal protection than your IRAs for your asset protection.
See Pros and cons of rollover from a 401(k) to an IRA for more detailed discussion on this.
3. Rollover to Your New Employer’s 401(k)
If your new employer offers a 401(k) plan, you can choose to roll over your old 401(k) funds into the new plan.
Benefits:
- Consolidation: Transferring your retirement savings to your new employer’s 401(k) combines your old and new retirement accounts, simplifying your finances.
- Similar or Better Diversification: Ensure that the new 401(k) plan provides comparable or enhanced diversification with more asset classes, enabling you to build a well-rounded portfolio.
- Lower Fees: Assess the fee structure of the new plan and compare it to your old plan to determine if you can benefit from lower costs.
- Better Investment Options: Look for a new employer’s 401(k) plan that offers attractive investment options, such as ultra-low index funds and quality bond funds for fixed income.
Considerations:
- Review the investment options, fees, and the overall quality of the new employer’s 401(k) plan.
- Ensure the plan aligns with your long-term investment goals.
4. Cash Out
Cashing out your 401(k) should generally be a last resort due to potential drawbacks, but it may be necessary in certain circumstances.
Considerations:
- Taxes and Penalties: Withdrawing funds from your 401(k) before reaching retirement age typically incurs taxes and early withdrawal penalties.
- Loss of Long-Term Growth: Cashing out early deprives your retirement savings of potential growth over time.
- Immediate Financial Needs: Only consider cashing out if you have an urgent financial need and have exhausted other sources of funds.
In general, we don’t advocate cashing out option under normal circumstances.