If you are beginning a new job and are wondering what to do with your old 401(k), you have four main options to consider: cashing out, keeping the money in your old 401(k), rolling the money into an IRA, or rolling the money into your new company’s 401(k). This article will cover all four choices.
While taking the money out of your old 401(k) may appear to be the simplest option, if you are under 59½ years old, everything you saved will be subject to normal income taxes, along with a hefty 10 percent penalty tax. Additionally, money in a 401(k) is protected from bankruptcy court and creditors, so this may not be the best option if bankruptcy could be in your future.
Most employers will allow you to keep your 401(k) with them after you leave. If you select this option, you can continue to enjoy the benefits of your old 401(k), including lower-cost or unique investment options and money-management offerings the plan provides.
However, you will not be able to make further plan contributions and you usually will not be able to take out a loan from your old 401(k). You may also be limited to withdrawing the entire amount you saved if you need to access those funds.
Most financial institutions offer IRA accounts that you can move your 401(k) funds into, tax-free and without penalty. However, if you need to borrow from those funds in the future, you will not be able to do so with the money in an IRA. On the other hand, many 401(k) plans allow you to borrow against the funds as long as you are still working for the company. Be sure to learn about your new employer's policies before you decide what to do with your old 401(k).
Another option is to move the money into your new company's 401(k) plan. The money will not be taxed, you will not be penalized, and you will only have one account to manage. Of course, you will have to follow the rules of the new 401(k) plan, so make sure you understand them well.
Ultimately, there is no right or wrong choice in terms of what to do with your old 401(k), so consider each option carefully and pick the one that is best for your situation.