What to Do With a 401(k) When You Change Jobs
If you change job and had a retirement plan with your now existing employer you are faced with the question of what you should do with that account.
Here are some options:
1.You can cash out the account, pay tax and potentially penalty on the distribution and then take that after tax money and invest it or spend it.
This is often not the most efficient or most attractive choice to make especially if you have a good amount of money inside of the retirement plan.
The cash out will be added to your other regular income (for the year in which you take your cash out) and suddenly you may end up in a higher tax bracket.
2. Do a transfer of the money to your new plan of your new employer, if the new plan allows for this type of transfer.
From a tax perspective the tax law encourages transfers between companies and these types of plans and as long as you don’t take any withdrawals, you will not owe any current income tax, and all your old plan money can continue to grow until you begin income from this plan in retirement.
3.You can also transfer the money directly to a Traditional IRA set up in your name.
Again you have to arrange this transfer between the plan you are leaving and your new choice of IRA provider.
In this type of case, you do not receive money and again there is no current income tax concern.
4. You may transfer the plan money into a Roth IRA, if you qualify.
In a Roth conversion, you will pay current income tax on the amount that you are converting and then you can qualify for income tax free distributions later on.
This works as well as long as you follow the rules around Roth conversions.
So what is the best option?
It is not possible to say which option is the best. Things such as current liabilities,
Things such as current liabilities, short term savings, age, income and what else is in place financially will determine the best route.
In many circumstances you will need to do a full financial assessment before being able to make a correct decision.