What should I do with my 401(k)?

You may have moved on from a past employer, but don’t forget about your 401(k). There’s retirement money in there that’s all yours. You’ve got four basic choices for how you want to handle those funds: stay, move, roll it or cash out.

Stay where you are
You can keep your retirement assets in your former employer’s 401(k) plan and call it done. You’ll always be able to access the money in the future. If you decide to stay, you will want to keep in mind the issues highlighted below.

• Maintain the same benefits. Your account can continue to grow tax-deferred, and you remain invested in the funds you’ve already chosen.
  
  
• Contributions will end. You won’t be able to add money to your old 401(k). If your employer matched your contributions, that stops too.
  
  
• Expenses will continue. Compare the expenses and fees of your old plan with a new one, if available.
  
  
• Know your choices. If your vested balance is $1,000 or less, your former employer may automatically cash you out. For vested balances between $1,000 and $7,000, your plan might roll your balance into an IRA (individual retirement account) selected by your former employer.

Move to your new company’s plan
If your new employer provides a 401(k) plan, you could be allowed to roll over your previous account into the new one.
 

• Stay organized. Many employees leave a trail of forgotten 401(k)s as they jump from job to job. It’s easier to manage a single account.
  
  
• Learn new rules. Your new plan may have different rules, such as withdrawal restrictions. Check the summary plan description (SPD) or plan document for more information.
  
  
• Review your investments. Your choice of investments is limited to what your new employer offers, so be sure you’re okay with the options.

Roll it over to an IRA
A “rollover” is when you take money from one retirement plan or IRA and move it into another retirement plan or IRA. By rolling your retirement savings into an IRA, you continue to enjoy tax-advantaged growth potential.

• Consolidate and concentrate. You can roll over any number of 401(k) accounts into a single IRA and continue making contributions into the IRA.
  
  
• Know your limits. There are contribution limits to how much you can contribute each year to an IRA or 401(k).
  
  
• Choose traditional or Roth. A traditional IRA gives your money the potential to keep growing tax-deferred. A Roth IRA — like a Roth account in a 401(k) or 403(b) — can provide tax-free growth and tax-free withdrawals on qualified withdrawals. Roth 401(k) or 403(b) accounts will be rolled into a Roth IRA. Non-Roth accounts can be rolled into a traditional or Roth IRA. You’ll be responsible for any unpaid taxes on the taxable portion of a Roth IRA rollover. A financial professional can help you make the right choice.
  
  
• Roll over. To avoid the money being subject to taxes and having income tax withheld, consider making a direct rollover where the money goes directly from your old plan to the IRA. If you request a cash distribution (i.e., a payment to yourself), you can still do a rollover to an IRA, but you must do so within 60 days. Taxes will be withheld from a distribution from a retirement plan, so you’ll have to use other funds to roll over the full amount of the distribution.

Cash out

If you really need it, you can take money from your 401(k). But try to avoid this move if you can. Cashing out could leave you with a lot less in retirement. You may have to pay taxes and penalties, and you'll also be losing the tax benefits that come with a retirement plan account on the amount withdrawn. However, withdrawing your plan balance does give you cash in hand. You’ll have money to take care of current needs.

• It will cost you. If you make a withdrawal from your 401(k), your employer must withhold 20% of the taxable portion of your distribution for federal income taxes. You also could pay federal, state and local taxes on the taxable portion of your distribution. Plus, if you’re under 59½, you may have to pay a 10% early withdrawal penalty unless you meet an exception.
  
  
• See the big picture. While it may be tempting to think of that money sitting there with your name on it, don’t forget what you saved it for in the first place. Less money in your account means less potential growth, which then means less potential income for you when you retire.
  
  
• Avoid impulsive decisions. Instead of cashing out your entire account balance, consider taking a distribution for just what you need. That way, you avoid paying applicable taxes and penalties on the rest of your account. The remaining amount has the opportunity to keep growing tax-deferred if you leave it in the plan or roll it into an IRA or another plan.

There’s much to consider when it comes to planning what to do with your retirement savings. It’s important to work closely with your tax and financial professionals to make sure you make the right decisions for your situation.