Did you leave your vested 401(k) balance behind at your old job? If so, you’re not alone. According to a 2012 Transamerica study, 22 percent of respondents said they didn’t do anything with their 401(k) balance the last time they changed jobs.1
You might have left your plan behind because you forgot about it, or you may not have known what your options were. Either way, just because you left your plan at your old employer doesn’t mean it has to stay there. You have options available.
Below are three of the most commonly used strategies for handling a 401(k) plan held at a former employer. Consider your needs and goals, and choose the option that works best for you:
Cash it out.
There’s nothing saying you have to leave the money in a 401(k) plan at all. You have the option of cashing out the plan and getting a check for the balance. However, there are a couple of reasons why you may not want to do that.
First, you will likely have to pay taxes and penalties on the withdrawal. Withdrawals from 401(k) plans are taxed as ordinary income, and your employer may automatically withhold a portion of the check to cover your anticipated taxes.
Also, there is a 10 percent early-withdrawal penalty for withdrawals from a 401(k) plan before age 59 ½. That penalty may not be withheld from the check, but it will figure into your taxes at the end of the year. There are exceptions for the penalty, but they’re usually only for extraordinary circumstances, such as disability.
If you have an urgent and important need for cash, withdrawing the balance may be a viable option. However, it could also be a costly decision.
Move it to your current 401(k).
If your new job has a 401(k) plan, you may be able to roll your old balance into your new account. By doing so, you’ll avoid taxes and penalties, as the funds will be transferred and now withdrawn. The benefit to taking this route may be simplicity. All of your 401(k) funds would be in one place, which may make them easier to manage.
Of course, the downside to moving your old plan into your new one is you would then be limited to the investment options in your current 401(k) plan. That could be problematic if your plan offers a poor selection.
Roll it into an IRA.
Your third option is to roll your old balance into an individual retirement account, also known as an IRA. When you rollover your 401(k) funds into an IRA, you don’t face taxes or penalties. This is because the transaction is considered a rollover instead of a withdrawal.
Rolling your funds into an IRA may give you more control over the investment strategy and a wider selection of investment options. Many IRA providers offer a wide range of diverse choices. Also, if you’re working with a financial professional, they may be able to advise you on your IRA as a piece of a much larger retirement income strategy.
For more information, contact your financial professional. They can help you analyze your options and decide on the best strategy.
Global Financial Private Capital (GFPC) and GF Investment Services (GFIS) have no affiliation with the news agencies represented here and the views expressed do not necessarily reflect the views of GFPC or GFIS. GFPC and GFIS make no representations or warranties about the accuracy, reliability, completeness or timeliness of the content and do not recommend or endorse any specific information contained therein.
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