Understanding 401K Rollovers

If you leave your job and have a current 401K at your old company, you must decide what to do with it. While leaving it where it is an option (sometimes), it’s not always the best choice.

Keep reading to learn the factors you should consider when rolling over a 401k.

Leaving your 401K at your Old Employer

As we said, you can leave your 401K with your old employer, but it only makes sense in certain situations. Before considering it, ask your employer if you can leave it - some don’t allow it.

If it is an option, consider the following:

  • Does your old 401K offer better investments than the 401K at your new job?
  • Are you starting your own business or working as a contractor and won’t have a 401K?
  • Does your new employer not offer a 401K until you’re there for a certain time?

In this case, keeping your 401K with your old employer may work, but temporarily. Because you can’t make new contributions, your balance only grows as much as you earn on your investments.


Rollover to an IRA

If your new employer doesn’t offer 401K benefits right away, consider opening an IRA. Most IRAs offer more investment options and control than 401K plans. You can choose from stocks, bonds, mutual funds, CDs, and even real estate investment trusts.

If you choose the IRA, you can choose from a traditional or Roth IRA. The traditional IRA offers tax deductions now, so you save money when setting it up. But when you withdraw the funds, you pay taxes on the contributions and earnings. If you’re in a lower tax bracket when you retire, you’ll pay fewer taxes.

If you choose the Roth IRA, you don’t get the tax deduction now, but your earnings grow tax free. Any withdrawals you make after age 59 ½ are tax free; this includes the earnings on your investments.


Rollover to a 401K

Does your new employer offer immediate access to a 401K? You can rollover your old 401K into the new one, keeping all of your funds together. You get the benefit of having someone else manage your retirement account plus you can make new contributions, growing your balance. If you kept your 401K at your old employer, you can’t make any new contributions. Your investments may grow from the earnings, but that’s it.


The Last Resort - Cashing out your 401K

You may cash out your 401K, no matter your age, but you’ll pay a penalty. This should be your last resort unless you’re over age 55 and no longer working. If you’re younger than age 55, you’ll pay a 10% penalty plus the taxes on the money you withdraw.

Don’t leave your old 401K funds sitting idle. If you leave your job, your 401K should be a top concern. Only consider leaving it if you have great investments that you can’t replicate in an IRA or in your new 401K. Otherwise, use one of your options to continue investing your funds and growing your earnings so you can have a financially secure retirement.


Disclosure: This article is not to be taken as investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal, insurance, or financial professional. The observations made in external articles are independent of Wimple and should not be read as financial recommendations.