Quitting your job can be exciting! You’re moving on to something new, but it also means you have to handle some grown-up stuff, like your 401(k). A 401(k) is like a special savings account for retirement that your employer might have helped you set up. When you leave a job, you get to decide what happens to the money in that account. Let’s break down the options so you know what to expect when you quit and how to make the best choices for your future.
What Are My Options?
So, the big question is: **What are your options when you leave your job?**
You have a few different choices! First, you could leave the money where it is, in your old employer’s 401(k). This is a pretty common choice, especially if you’re happy with the investments you have and the plan allows it. It means the money stays invested, and it continues to potentially grow over time. But, you won’t be able to make any new contributions.
Rolling Over Your 401(k)
Another popular option is to “roll over” your 401(k). This means moving the money into a different retirement account. There are two main places you can roll it over to:
- A new 401(k) with your new employer: If your new job has a 401(k) plan, you can usually roll your old one into it. This keeps things simple since all your retirement savings are in one place.
- An Individual Retirement Account (IRA): An IRA is a retirement account you set up yourself, usually with a financial institution. There are different types of IRAs, like Traditional IRAs and Roth IRAs. You’ll need to consider the tax implications of each one.
Rolling over allows you to control your investments more. You can often pick from a wider range of investment options than what your old employer offered. It also means your money will continue to grow tax-deferred, which is a great advantage.
Here’s a quick comparison table:
| Option | Pros | Cons |
|---|---|---|
| New 401(k) | Convenient, might have lower fees | Limited investment choices compared to an IRA |
| IRA | More investment choices, more control | May involve higher fees, more responsibility |
Taking the Cash
You might be tempted to take the cash out of your 401(k). It’s your money, right? Well, while you can do that, it’s generally not the best idea. When you withdraw money from your 401(k) before retirement age (usually 59 1/2), there are some serious downsides.
First, the IRS will hit you with a 10% penalty on the amount you withdraw. Plus, the withdrawal is taxed as ordinary income, which means you could owe a big chunk of money to the government during tax season.
- This option is not recommended because you will lose out on many years of compounding interest.
- You also won’t have the retirement money you have saved.
So, if at all possible, try to avoid taking the cash. Think long-term. If you’re having a financial crisis, consider a loan against the 401(k) rather than a withdrawal. However, if you do withdraw the money, it’s a good idea to speak to a financial advisor for guidance on this, and on how to manage the implications.
Taxes and Fees
Let’s talk about taxes and fees. They can impact your 401(k) decisions. The good news is, most of the time, the money in your 401(k) grows tax-deferred. This means you don’t pay taxes on the investment gains year after year. Taxes only come into play when you start taking the money out in retirement.
When you roll over your 401(k) to another retirement account, you’re not triggering any taxes at that moment, as long as the rollover is done correctly (a “direct rollover” is the best way to avoid any issues).
However, some fees may be associated with your accounts. Here are some common fees to be aware of:
- Administrative fees: These fees cover the cost of running the 401(k) plan.
- Investment fees: These fees are charged by the companies that manage the investments you’ve chosen (like mutual funds or exchange-traded funds).
- IRA maintenance fees: If you roll over into an IRA, you may have these fees to maintain the account.
Be sure to check your account statements for details on fees and understand how they could impact your returns. Sometimes, fees can eat into your savings over time, so it’s a good idea to shop around and compare the fees between different plans or investment options when you can.
The Importance of Planning Ahead
So, you’ve got several options. Ultimately, the best choice depends on your personal situation, but the best advice is to start thinking about this before you quit your job. You may be leaving the job, but don’t leave your financial future to chance.
Think about these questions:
- What’s your age?
- What are your financial goals?
- Do you want a wide variety of investments?
Decide how to proceed and make a plan for your 401(k) when you quit to secure your retirement savings for your future. When you are well-informed, you can take the right steps for your future.
It’s a good idea to research the options available to you and possibly consult with a financial advisor.