These days, it’s rare for an individual to stay with the same company throughout the duration of their career. You will probably face the decision of moving on to greener pastures someday… But what about your employer-sponsored 401(k)? Do you have to leave it behind?

No, luckily you will have options. Generally speaking, most workers can choose from the following actions when deciding to change employers:

  • Leave the money in your old employer’s 401(k) plan
  • Move the savings to your new employer’s plan
  • Roll over the funds into an Individual Retirement Account (IRA)
  • Cash out your retirement savings

Sometimes, it makes sense to leave your savings in the old employer’s account. If you’re facing a lay-off, for example, you might need some time to sort through various decisions. This one can wait a few more months. Otherwise, leaving your savings in the old account only makes sense if your former employer’s plan is superior in some way. In most cases you wouldn’t want to sort through several retirement plans and keep track of all of them after retirement.

Moving the savings to your new employer’s plan makes sense, if the new plan offers at least the same benefits as the old one. It will certainly be easier to manage over time. However, you should conduct the rollover carefully in order to avoid a tax penalty.

If your new employer does not offer a 401(k), or if you don’t like the plan for some reason, rolling over your funds into an IRA might be a good choice. Again, you will need to conduct the rollover according to specific guidelines, in order to avoid paying a hefty penalty at tax time. Also, you can re-evaluate the tax status of your retirement savings at this time. If you roll over into a Traditional IRA, you will continue to make pre-tax contributions and defer those taxes until retirement. Or, you can choose a Roth IRA, and make after-tax contributions throughout your career, in exchange for nontaxable income in retirement.

Finally, the fourth option is to simply cash out your retirement savings. This is rarely a good idea, because you will pay a significant tax penalty for doing so. And, while you can always start saving for retirement again, you can never recover lost years of interest on the money you cashed out. We can’t recommend this option.

If you’re considering a rollover of funds, remember what we said about tax penalties: The rollover must be conducted carefully to avoid excessive taxes. Give us a call if you’re considering this move, and we can help you understand rollovers and the correct procedure.