You’re currently thinking about changing things up in your career and are wondering what happens to your 401(k) when you quit your job.
Typically, companies will offer their employees a few options in regards to their 401(k) after departing from the company. For this article, we’ll be discussing options for a traditional 401(k). There are four main options available to employees.
Four options for your 401(k) when you quit your job:
1. Keep your current 401(k) plan
The easiest option is to just keep your money in the current 401(k) account. The benefit to this is that you don’t need to worry about switching investments or firms.
If you keep your current plan, however, your invesment options will be limited. Also, your previous employer can switch firms as it meets their business needs.
It is also important that you check with your company’s benefits administrator to see if there are any fees or requirements for keeping your money in the employer 401(k). For example, some plans require you to withdraw your money if the balance is under a certain amount.
2. Rollover 401(k) to an IRA
The second option is to roll your employer 401(k) into an Individual Retirement Account (IRA). A new IRA can be opened at your choice of financial institutions like M1 Finance, or put into an existing IRA you already have.
Keep in mind that there are different tax advantages for different types of IRAs. For example, you may want to consider moving your 401(k) into a traditional IRA (instead of a roth IRA) when you quit in order to continue deferring taxes. If you want to learn more about IRAs, check out Roth vs. Traditional IRA | How to Choose.
3. Move the 401(k) to your next employer
Another tax-deferred option is to transfer your 401(k) funds to your next employer. This is a good option to keep if you want to keep all your 401(k) investments in one place. You should, however, compare the new and old plans to ensure you aren’t giving up better advantages when you transfer plans.
4. Cashout option
What if you no longer want to keep your money in a 401(k) when you quit your job? If you no longer wish to have the account, there is a cashout option available.
If you choose to cash out your 401(k) when you quit, keep in mind that you may be subject to capital gains, income tax, and other fees and penalties. For example, capital gains tax could amount to 20% or more while income tax varies on your earnings. Also, if you are under 59.5 years old then you may also have to pay an additional 10% penalty on your 401(k) amount.
As you prepare to quit your job, it’s important to get educated on the options available in regard to your 401(k). Create a plan and be sure to speak to your human resources department about any questions you have.
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