By Lauren Hunt, Moneta Advisor

If you have a 401(k) plan, you are familiar with the benefits afforded by these popular retirement accounts. They are a great way to set aside earnings into investments that can grow over the years, especially if your employer matches your contributions. Employees who leave their companies have several options when it comes to their 401(k) plans, and each option has advantages and disadvantages.

  1. Keeping your existing plan where it is with your former employer
  2. Moving your assets to a new employer’s 401(k)
  3. Moving your assets to a Rollover IRA or Roth IRA
  4. Cashing it out completely

Keep your old 401(k) where it is and start another one at your new job

This option is easy; you do not have to do anything so long as your plan balance is more than $5,000. You will avoid the possibility of taxes and penalties, and you are likely already familiar with the investment options within the plan.

Leaving your old 401(k) in place can be a good option if you are between the ages 55 and 59 ½. If you leave your job during or after the calendar year in which you turned 55, you can take penalty-free withdrawals (although you will still pay ordinary income taxes on all pre-tax distributions).

Before making any decision, ask your former employer if there are any restrictions or additional fees associated with the plan once you leave the company. It should also be noted that a possible drawback to having two accounts is just that— there will be two sets of records to track.

Close your existing account and move your assets to your new employer’s 401(k)

Many companies permit a simple transfer of assets from one 401(k) to another. One benefit of this option is that you will incur no taxes or penalties. The record keeping aspect of this option is especially attractive as you will have one account to track and manage.

It should be noted that while some companies allow new employees to transfer the money right away, others require you to wait a period of time before becoming eligible to enroll. Additionally, the new plan may offer different or fewer investment options that may or may not meet your needs.

Roll over existing 401(k) assets to a Rollover IRA or Roth IRA and start another 401(k) at your new job

This approach has one important potential advantage: Your investment choices may be broadened significantly since IRA assets are not attached to an employer and can be invested in thousands of individual securities or mutual funds. By contrast, many 401(k) plans offer only a small specific menu of options.

Within an IRA, you will also have greater freedom to name beneficiaries. The beneficiary of your 401(k) plan, by law, must be your spouse; you must obtain a signed release from him or her if you want to name anyone else. With an IRA, you can name any beneficiary you wish.

There are, however, some potential disadvantages to rolling over your existing plan:

  • You cannot borrow against money in an IRA the way you can with many 401(k) plans.
  • You will have to monitor two separate accounts.

Also, keep in mind that, if you choose this option, the money should be rolled over directly from the 401(k) to the IRA as a trustee-to-trustee transfer to avoid the mandatory 20% federal tax withholding.

Cash out the account

It is quite tempting to take a 401(k) distribution in cash but cashing in a 401(k) carries serious consequences and is not a good option for most people.

If you are under 59 ½, all pre-tax contributions that you take as a distribution will be subject to ordinary income taxes—federal, state, and local—and potentially a 10% IRS early-withdrawal penalty. If you left your job during or after the calendar year in which you turned 55, you will not owe the early-withdrawal penalty.

For most people, the best option is to move your savings into an IRA, which gives you the most freedom and control over your money. Because each plan is written differently, it is important that you consult with your employer and your tax advisor to find out what the best options may be for your situation.

© 2020 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only, based on generic assumptions. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.