When individuals leave a company for a new opportunity, many leave their employer-sponsored 401(k)s behind. The reasons for doing so may range from confidence in the company's investment strategies to procrastination or a lack of knowledge about how to handle the account. Whatever the reason may be, it's important for adults to know their various options so that they may continue maximizing their retirement planning and bolster their nest egg funds.
The first and simplest option is to simply leave the funds in the account. Workers may continue to accrue interest and benefit if the company has a smart investment plan. However, employees will miss out on the ability to continue making contributions to their fund and obtaining the lucrative employer match that may come with it. In addition, if the amount in the account is less than $5,000, many plans may distribute the funds automatically. Account holders may also be barred from taking partial withdrawals or loans once they leave their job, giving them fewer options and access to their funds.
Another option is to roll the 401(k) into an IRA. This is a popular choice, namely because it allows them to continue growing their investment in a tax-deferred account. Perhaps more importantly, IRAs give individuals a greater range of investment options and authority than employer-sponsored 401(k) plans. For those who are trying to take charge of their accounts and make more crucial decisions about their investments, this may be the most favorable option. IRA account holders may also have the option to take penalty-free withdrawals for a first-time home purchase or qualifying educational expenses.
Should you take your old 401(k) with you?
Many individuals may appreciate the benefits of having more control over their investments, but still might want to stick to an employer-sponsored plan. If this is the case, employers allow new workers to roll over their old accounts into the company's plan. This can be a smart option for those who only want to manage a single retirement account, as opposed to several different investment vehicles. However, employees should understand that any money rolled over to their new employer will be subject to the company's plan rules.
Lastly, individuals may choose to cash out their plans. While this option may give them an immediate payout, they will be hit hard with ordinary income taxes and a 10 percent early withdrawal penalty. For those who are having difficulties deciding which option is best, contacting a tax preparer may help them best understand their options.