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Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance.

Options for Your 401(k) Plan When Changing Jobs

Options for Your 401(k) Plan When Changing Jobs

By Britt Erica Tunick

Spending your entire career at one company is usually a thing of the past these days. It is more than likely that at some point in your career you will switch jobs –possibly even multiple times. Part of changing jobs means changing benefits and deciding what to do with your 401(k) retirement plan from your former employer, assuming that you were lucky enough to have one.

If you have invested in a 401(k) plan with a former employer, depending on how much money is in your portfolio, you have the option of keeping those assets with your previous employer, rolling them over into an IRA or a 401(k) plan with your new employer, or, possibly, even cashing out –if you are of retirement age. What makes the most sense for you will depend entirely on your individual circumstances.

As long as you have at least $5,000 invested in your 401(k) plan, you will usually have the option to keep your assets managed by your former employer. If the amount is less than $5,000, however, different rules apply. The important thing to know is that there are strict rules about what must be done with money withdrawn from a previous employer’s 401(k) plan, and there is a stringent timeline in which to do so.

If the 401(k) plan of a former employer has low fees, a good variety of investment choices, and is well managed, keeping your money where it is may well be your best choice. Just know that once you are no longer employed with that company, you cannot make additional deposits into that portfolio. Thus, you will need to keep an eye on multiple accounts if you are going to invest in another 401(k) plan with your new employer. Keeping your money with a former employer may also restrict your withdrawal options, necessitating an all or nothing withdrawal approach, versus the ability to take partial withdrawals.

Rolling over your 401(k) into an Individual Retirement Account (IRA) or your new employer’s 401(k) plan may be a better option if you are able to get lower fees and better investment options and if you are looking to consolidate your holdings into one portfolio. If an IRA is your choice, you can do so with either a bank or an investment firm –just make sure to look closely at any fees you will incur for management of your assets. Over the long run, fees can have a significant impact on the overall amount you are left with at the time of retirement.

Regardless of what you choose to do, you have 60 days to reinvest the money withdrawn from a 401(k) plan into another retirement savings vehicle. Failing to do so can be extremely costly, as it will open you up to being taxed on the money you removed and, possibly, even penalties. It is equally important to make sure that any money rolled over from a former employer is rolled directly into a new retirement vehicle, with the check made out to the new custodian, and not to you, if you want to avoid the mandatory 20% withholding tax on the distribution. On top of that, if you do not roll over the exact amount you’ve removed from a former retirement account into a new retirement vehicle, you run the risk of not only losing the tax-deferred or tax-free benefit of that money, but could also face an additional penalty.

Finally, if you are uncomfortable making such decisions yourself and would instead prefer to use a financial advisor, make sure to do your homework. Many financial advisors have ties to some of the retirement products they suggest and receive commissions for routing your money to those plans. Needless to say, this is something you want to know in advance, as you want to be sure that your advisor’s recommendations are unbiased and are truly in your best interest.