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What can you do with your 401k when changing jobs?

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Figuring out what to do with your 401k when changing jobs can feel intimidating. We've spelled out your 4 key options in this guide below.

Key takeaways

  • Don’t cash out your 401k savings unless you absolutely need to. You’ll pay taxes and penalties, and lose the chance to grow your assets over time.
  • Rolling over your 401k into an IRA is generally the easiest choice. It allows you to monitor your fees and investments, and you stay in control of your assets. You get to choose the company that manages your money – not your employer.
  • Rolling over into a new 401k (if that’s a possibility) is not a bad choice either but often takes longer, requires more work, and isn’t always possible.

Cash out your 401k savings

If you’re under 59 and a half then this is almost never a good idea, unless you have an emergency and really need the cash. Why? Because you pay taxes on the money you withdraw plus a 10% penalty. You also give up the opportunity for your 401k savings to grow tax-free over decades. This is known as “leakage” and it’s a big reason why people don’t end up saving enough for retirement. There are some limited circumstances in which you can withdraw from your 401k without taxes and penalties – some of these are known as hardship withdrawals – but avoid cashing out your 401k if you can.

Rollover your 401k into an IRA

This is known as a 401k-to-IRA rollover, or a 401k-rollover for short. Most people opt for this because it’s easiest to do and allows you to more easily keep track of your retirement savings than if you leave money in your old 401k. It also gives you a chance to make sure you’re not paying too much in fees – sometimes your old 401k can have high fees attached to it – and check that you’re money isn’t allocated to the wrong investments. It also allows you to pick an institution that you actually want to manage your retirement account – whether that’s a tech-savvy digital institution, or a brand-name broker.

Rollover your 401k into a new 401k at the company you're moving to

If your new employer also offers a 401k, then this is a possibility. It’s known as a 401k-to-401k rollover. It’s generally trickier than a 401k-to-IRA rollover and can take longer to do. It’s also not always possible because the new company you’re going to might not offer a 401k or have restrictions on rolling over 401k accounts from previous employers. But if it’s allowed then it’s worth considering. Just be aware that you’ll eventually need to roll over into an IRA when you leave the new employer, or down the line.

Leave your 401k where it is

Not all employers will let you do this, but some of them may let you just leave the 401k account where it is even if you’re leaving the company. Most people don’t like the idea of leaving their money behind because then they remain tied to their old employer and their 401k provider. There’s also a risk that your old employer initiates what’s known as a forced rollover to an IRA provider of their choice. This usually happens for small accounts under a certain size (usually less than $5,000). For these reasons most people eventually transfer their money out of their old 401k.

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