What to do with your 401(k) after leaving your job

Patrick Sgroi President
In the past, it was not uncommon to see people spend their entire career with one employer. In the present day this is much more of the exception than the rule. In fact, according to the Bureau of Labor Statistics, the average worker stays at a job for only 4.6 years. Whether you’re changing careers or retiring, everyone eventually comes to the point when they will leave their job. When that time comes you have a decision to make in regards of what to do with your 401(K). Each company’s 401(k) plan may be different, so not all options may be available. In general, your options may include the following:

Roll over to an IRA

Moving your investments to an IRA (Individual Retirement Account) is the most popular choice. An IRA would allow you more options and control over your investments. A typical 401(k) plan might have 20-40 investment options; compared to an IRA which could offer over 10,000 options. When rolling over your 401K to an IRA you will be able to work with a financial planner who will offer guidance and advice tailored to your personal situation. In most instances 401K plans do not offer the same level of advice and guidance and tend to be more “cookie cutter” solutions.

Stay in old workplace plan

If permitted, this option lets you stay in the plan and continue to have the potential for tax-deferred growth while having to take no action. This situation might make sense if it’s an excellent, low-cost plan. However, you will no longer be able to contribute to this plan once you leave this workplace. Additionally, many employers don’t want to service the account for people who no longer work for their company.

Roll over to new workplace plan

If allowed by your new employer, you would be able to roll over your old 401(k) plan into your new 401(k) at your new job. This option assumes that you are participating in your new 401(k).

Cash out

This option should be viewed as a last resort. By cashing out your 401(k) plan, the distribution would be subject to state and federal taxes. In addition, if you’re younger than 59 ½ a 10% IRS withdrawal penalty may apply.

Weighting your options

In many cases rolling over a 401(k) into your own IRA may be the best choice. However, because everyone’s situation is different it is important to understand what your options are and any possible tax consequences before taking any action. Meeting with a financial planner will help you better understand the pros and cons of all your options before making the decision.
Sgroi Financial is a full service, independent financial planning firm proudly serving the Western New York area since 1971. We offer services that will help you achieve your financial goals including retirement planning, investment management, estate planning, college planning and insurance. We help individuals, families, retirees, working adults, young adults and businesses.

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