By Tammy Rasplicka
Whether you’ve taken the next step in your career, left behind a company that wasn’t a good fit for you or the company decided it was time to part ways, you should be prepared to manage your 401(k). Changing careers is an emotional move – there’s excitement for the new opportunity, sadness about leaving your favorite coworkers behind, depression if you weren’t ready to leave, worry about how to financially bridge the unemployment gap and anticipation of the new career all at once.
Take a breath. Remember to close that last chapter before you get too involved in your new one. Let’s go over the four things you can do with your old 401(k) to help you move on to your next great career adventure.
Roll It Into an IRA
One of the most common decisions is to roll your old 401(k) into an IRA account. This will allow you to maintain your tax-deferred status and continue to grow that nest egg for your retirement. If you’re not familiar with how to accomplish this move or want to leave this up to the professionals, consult a financial advisor.
This could be your first opportunity to work with a financial advisor and learn all the ways you can prepare early to meet your financial goals. Take advantage of this time with the financial advisor to make sure you’re on the right track. If you’re not, put a plan in place, get on the right track. The sooner the better.
Leave It Where It Is
You may elect to do nothing and leave your assets in your old 401(k) plan, but be sure you know the details on balance requirements before you do. In many plans, your account balance may need to exceed a certain balance to be allowed to stay in the plan. Your plan documents will outline the specifics of this provision, so be sure to check the balance requirement and if there are any deadlines by which you need to move your assets out.
If you select this option, and your balance is below the minimum allowed to remain in the plan and you wait too long you may receive a check for the balance of your account in cash sent to your last address of record. Be sure to review your plan documents when you leave your previous employer for balance requirements and timelines for rollovers. Your previous employer is required to give you 30 days’ notice before any liquidation occurs.
Cash It Out
Regardless of the balance of your old 401(k), you may elect to cash out and receive the balance in cash. There are a few very important tax implications to making this choice that may pertain to your situation, so consulting an experienced tax advisor is well worth your time.
These tax implications could include a 10% penalty on the balance if you’re under age 59 1/2 or additional tax due at the end of the year because of your increase in income. It’s worth stating again, this decision is best made while consulting with an experienced tax advisor.
Roll Over into Your New Plan
The final choice you could make, if your new employer’s plan allows, is to roll over your old 401(k) into your new plan. This will allow you to consolidate your employer benefit plan assets in one location. Depending on your stage in life and investment knowledge you may already see a potential drawback to this option – limited investment options in your new plan.
Ultimately, managing your 401(k) isn’t a decision that should be taken lightly. You should work with a financial advisor to ensure that you have a plan for your financial future. Your advisor can create a plan specific for you and set you on the right footing (or bring you back to the right path) for successful financial health.