Weigh your 401(k) options when leaving your job
Leaving your job requires you to make some tough decisions about your employer‘s sponsored 401(k) account, and understanding the implications of each option can help you make the best choice. Prior to leaving, most employers will provide their workers with a set amount of time to determine what to do with their 401(k), and during this time it's crucial to explore every alternative. Employees have four primary options:
Leave the money where it is
If you're happy with the investment allocation at your former company, you may benefit from leaving your 401(k) behind and allowing it to continue growing. You will not face tax issues by leaving your funds where they are. However, leaving your money behind also means forfeiting the right to access your previous employer's financial services or re-allocate your investment, according to U.S. News and World Report. Consider your retirement goals and future objectives before leaving your hard-earned money in the hands of a former employer.
If this is the route you decide to take, make sure you keep all account information in a file so that you can find and draw distributions from the account at a later date. This information can be helpful over the years if the company moves, changes names or merges with another business, according to Kiplinger.
Roll the funds over to a new account
If you feel more comfortable taking the reins on your retirement funds and the investments in which they are allocated, rolling your 401(k) into a self-directed individual retirement account may be an advantageous option. These accounts are likely to provide more fund options than an employer-sponsored 401(k) account, giving individuals more leeway in making their own investment decisions, according to U.S. News and World Report. However, it's important to understand the different investment vehicles, how they function and the risks and rewards involved before switching a 401(k) over.
Invest in a new employer's program
Individuals who begin a new position may also consider rolling their old account into their new employer's retirement program. However, it's important that workers are well-versed and comfortable with their employer's mixture of investment options, because once they have rolled over their money, they are locked into their employer's program, the news source cautions.
Cash out the fund
Cashing out your 401(k) is also an option, but most financial professionals caution against it. Taking a cash distribution would result in heavy taxes and an additional 10 percent early withdrawal penalty for individuals who are under the age of 59 ½.
Building a healthy retirement account is imperative to avoiding financial shortfalls during your golden years, so give strong consideration to each 401(k) option before making a decision.
