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Changing jobs and wondering what you should do with your 401(k)?

  • by secure_asset
  • Posted on 22 August, 2019

By Bryan Spencer, President

Whether you leave your current position voluntarily or involuntarily you will be entitled to your vested 401k balance.  Your 401k vested balance will include the contributions your employer may have made, as well as your contributions:  pre-tax, after-tax and Roth.  Depending on the vesting schedule, whether it’s gradual or immediate vesting, you will be 100 percent vested once you reach your plan’s normal retirement age.

It’s important to understand the vesting schedule so you don’t forfeit any employer contributions that haven’t vested by the time you leave your job. If you have that luxury.

The first option after you leave a job is to cash out, and while this pool of money might look attractive, under no circumstances should you spend it unless you absolutely need to, it’s a terrible idea if you aren’t retirement age.

In some cases, you have no choice, you may need to use the funds. (If you’re not age 55 you may incur an additional 10% penalty to the taxable portion of any payout of your 401k). If you need to do so, try to minimize the tax impact. 

Regardless of your situation, consider taking money out of your 401k before you are full retirement age you are effectively stealing from your future self.  If you have $30,000 sitting in your account compounding 7 percent interest it could be close to $228,000 in 30 years.

The second option you have with a job change is to leave it in the existing plan (an amount of $5,000 or more). If you’re happy with the performance, just leave it. Compare your new employer’s plan vs. your old employer. 

The third option is to move the money into your new employer’s plan, make sure that you review your new employer’s fees and investment choices.  Sometimes you will find that your previous employer had a cheaper plan especially if you move from a large company to a smaller one.

The fourth option is to move your existing 401k into another retirement account which is typically a traditional IRA. This option will give you the most flexibility and is my personal favorite.  You will have thousands of investment choices, and you can continue to contribute to your IRA which you cannot do if you leave it in your previous employer’s 401k.

With an IRA you can invest in stocks, bonds or mutual funds allowing you to also shop around to find lower-cost funds than the ones previously available through your employer’s 401k.

While you cannot borrow from an IRA there are ways you can use the money early and penalty-free for first time home purchase or for college expenses.  So, if you would like some flexibility to invest your money how you’d like to consider rolling your 401k into an IRA.  If you prefer to be on autopilot with your retirement funds stick to the 401k.  Secure Investors Group is here to help you decide which choice may help you reach your retirement goals.

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