While it may not be the first thing you think about when you change jobs, you should never forget about your 401K. Naturally, when you have a 401K with your current employer and change jobs, you are left to wonder what you should do with your 401K.
Should I Cash Out My 401K When I Switch Jobs?
Many people cash out their 401K when they change jobs. One of the main reasons for cashing out is the unstable and poor economy in America; this means businesses have added expenses and could potentially fail. So, by cashing out, you safeguard the money you have accrued with this business against future loss.
We do need to mention that cashing out your 401K might not be the best plan though, because it is so tempting to spend that extra cash in your pocket. Still, while you may be tempted to renovate that kitchen or take that trip, you are actually spending your retirement money!
Should I Leave the Money in the 401K When Changing Jobs?
There are some advantages to leaving your money in a 401K. Firstly, you do not have to pay a 10% early cash out fee. You won’t be subjected to taxes either, because your 401K will be subject to taxes when it is withdrawn.
Fortunately, there is another option for employees thinking about switching jobs, more specifically the 401K rollover. The 401K rollover is not suitable for everyone though, because the employee in question must have a new job lined up before they leave their old job.
What Are My 401K Options When I Change Jobs?
Employees who are switching jobs have two options. The first option is a 401k rollover to an IRA. The second option is leaving your assets in the 401K plan of your former employer.
Before we elaborate on the rollover option, we must mention that leaving your money in the 401K plan of your former employer comes with some considerable risk. However, if you are close to retirement, leaving your money in the 401K plan is better than cashing it out.
Employees can also do a 401k rollover to an IRA. An IRA is quite similar to the 401K rollover. It is a retirement savings plan, more specifically a plan you contribute to based on your income. By choosing this plan with your new employer, you do not have to pay taxes either! However, the IRA can be connected to more restrictions, so be sure to check out this option in more detail before you do the rollover.
Please note that employees can use an IRA and a 401K simultaneously. Therefore, if you have the income to contribute to both, the rollover may be your best option.
Even though there are more than two options available to you when you change jobs, employees will find more options depending on their situation. For example, someone close to their retirement will not choose the same option as someone who is in their 30’s. So, before you choose a plan for your retirement, be sure to check the benefits that apply to you specifically.