New Job: Should Your 401(k) Stay, Go, Or Roll Over? A Look At IRAs

When packing up your desk for that next great career step, don’t forget about your 401(k) plan. Should it stay or should it go with you to the new job?

Your choices range from doing nothing, moving your savings to your new company’s plan, or rolling it over to an Individual Retirement Account (IRA). This account is generally referred to as a rollover IRA.

Here are a few things to remember about IRA rollovers versus 401(k) plans. The plans allow you to borrow against them, with pay-back requirements, and permit penalty-free withdrawals if you’re separated from the company after age 55. Any withdrawal from an IRA is limited to extreme conditions and will be assessed with penalties. Loans are never permitted, and once you turn 70½, IRAs have required minimum distributions (RMDs) that kick in whether you keep working or not. You can defer RMDs after 70½ in employee plans if you keep working.

IRAs have other advantages, like consolidation of multiple plans and a wider choice of investment options, not to mention guidance and money-management services that you likely won’t find in employee-sponsored 401(k)s. IRA rollovers, like 401(k) plans, keep investments in tax-deferred status.

Four 401(k) Plays To Consider

When you leave your job, you have four options of what to do with your 401(k). 

Keep It There

Many employers offer this do-nothing approach of leaving assets in a plan if the balance is greater than $5,000. This is not always the best path because while you’ll still have the plan, you may lose the resources that your employer’s relationship with the plan providers created. You also may get socked with administrative fees for record keeping, compliance, or trustee fees, some of which your former employer may have been subsidizing.

What you do get is the tax-deferred status on the investments, but you won’t have the same array of investment choices that you do with an IRA. Although the investments in a plan may include institutional-class products that can cost less and no trading-related expenses, there’s little flexibility beyond that. You’re pretty much stuck with the investment choices in the plans.

Roll Over to Your New Employer’s Plan

This choice may have many of the same advantages that keeping it with the old employer might have, such as the ability to access the money for loans and penalty-free withdrawals under some conditions. But the disadvantages are the same, with limited investment choices, potentially reduced access and control, and administrative-related costs. What’s more, you may have to wait until you’ve been there a year before you get access to the plan, or worse yet, there may be no plan at all.

Roll Over to an IRA

As with employer plans, your investments stay in a tax-deferred standing, but you now have a wider choice of investments, tools, and resources from which to pull. You can direct your investments into stocks, bonds, mutual funds, or ETFs that you choose. As noted, you can consolidate multiple retirement accounts into one, allowing you to have a better handle­­—a one-stop shop, if you will—on where all your investments are. Plus you now have the flexibility to convert from a traditional IRA to a Roth IRA, which will cost you the upfront taxes but offers more flexibility on withdrawals and RMDs. You won’t have annual account or maintenance fees, but you’ll be tapped for expenses tied to trading, including commissions.

Take the Money and Run

This is generally considered an option of last resort, considering the potential tax and penalty-related consequences (depending on your age), not to mention the lost opportunities in potential growth and funding for your later retirement. But if you need the money, you need the money. But remember, if you’re under 59½, you may have tax consequences and a penalty to account for.

No matter which route you choose, your decision should be based on your investment objectives as well as the retirement plans themselves, and, yes, your age. Think about flexibility with the money and taxes. Consider, too, what you’re looking for in terms of investment choices or whether you just need the money now. Cashing out is an option, but it usually entails paying taxes and penalties.