(NewsNation) — Leaving a job comes with several decisions, including what to do with your retirement savings.
If you’ve been contributing to an employer-sponsored account like a 401(k) or 403(b) you generally have four options. You can leave it where it is, roll it over to an individual retirement account (IRA) or your new employer’s plan, or cash out.
The best choice will vary from person to person, depending on your account balance, future goals and employer’s rules.
Here’s what to know:
401(k) retirement savings: The good news
Good news: you don’t lose the money you saved in a 401(k) or 403(b) if you leave a job — it’s yours. But you will have to decide what to do with it.
Generally, you have four options, according to Fidelity, one of the largest 401(k) providers in the U.S.
- Keep the money with your previous employer
- Move the money into an IRA
- Roll the money over into a new employer’s plan
- Withdraw the money as cash
Keep the money with your previous employer’s 401(k) plan
You may be able to keep your retirement savings in your former employer’s plan even if you no longer work there. Your earnings will continue to grow and you can still manage your investments but you won’t be able to contribute additional money to the account.
Pros:
- It’s hassle-free, you don’t have to do anything
- Your old plan may have lower fees and better investment options than your new one
Cons:
- Your employer may force you to move the funds if your balance falls below a certain threshold
- It can be hard to track and manage multiple 401(k) accounts
- Your new plan may have better terms
Important point: If your balance has less than $1,000 vested when you leave then your former employer can force you out of the plan by cashing it out or rolling it into an IRA, according to Fidelity.
In some cases, if your vested balance is between $1,000 and $7,000 your former employer may also be able to automatically roll over your plan to your new employer, Fidelity said.
Move the money into an Individual Retirement Account (IRA)
You can also move your 401(k) or 403(b) funds into an IRA, which is not employer-sponsored and totally in your control. This can be a good option if you aren’t moving to a new job or your new employer doesn’t offer a retirement plan.
Pros:
- You may have more investment options than your employer’s retirement plan
- You won’t have to worry about making changes if you switch employers later on
- Greater withdrawal flexibility
Cons:
- Funds may no longer be eligible for a future rollover into a 401(k)
- You’ll need to take a more active investment role to make sure your funds aren’t sitting in cash
- Less creditor protection
- You can’t borrow against an IRA the same way you can with a 401(k)
Roll over your money to a new 401(k) plan
Your new employer may allow you to roll over your previous employer’s retirement plan. This can be a good idea for someone starting a new job because it enables you to manage your 401(k) funds in one place.
With a direct rollover, the funds go straight to your new 401(k) account and are not distributed to you. An indirect rollover is when you withdraw the funds and then redeposit them into another retirement account.
Pros:
- Easier to manage multiple accounts in one place
- May have new investment choices compared to your former employer’s 401(k)
- You may be able to borrow against it
- Assets are typically protected from claims by creditors
Cons:
- Your old employer’s plan may have better investment options and lower fees
- With an indirect rollover, you have 60 days to redeposit the funds to avoid taxes and penalties
- Potentially fewer investment options and less flexibility compared to an IRA
Cash out your 401(k)
You could just take your 401(k) money in cash, though financial advisors tend to advise against that. Taking the lump sum comes with a hefty tax hit and, depending on how old you are, an early withdrawal penalty.
Pros:
- The cash could be useful if you need it
- You can put the money toward other investments
Cons
- A cash distribution is subject to a mandatory federal income tax withholding of 20%
- Individuals under age 59 ½ (or 55 in some cases) face a 10% early withdrawal penalty
- Your savings will no longer grow tax-deferred