Changing jobs can be both exciting and stressful. The last thing on your mind is what to do with your 401(k) or other employer-sponsored retirement plan. You will likely have a few options to continue building tax-deferred savings. First and foremost, don’t take a lump-sum distribution from your old employer’s retirement plan. It generally will be taxable and, if you’re under age 59½, subject to a 10% early-withdrawal penalty.
Here are three tax-smart alternatives:
- Stay put. Many employer plans allow you to keep your plan, even after your separation from service. If you are satisfied with your investment choices and the fees are not too high, you may want to leave your money in your old plan. However, if you’ll be participating in your new employer’s plan or you already have an IRA, keeping track of multiple plans can make managing your retirement assets more difficult.
- Roll over to your new employer’s plan. If your new employer’s plan offers better investment options and/or lower fees, you may want to roll over your plan assets to your new employer’s plan. This may be beneficial if it leaves you with only one retirement plan to keep track of.
- Roll over to an IRA. If you are not satisfied with either of the plans offered by your old or new employer, you may want to roll over your plan assets to an individual retirement account (IRA). If you participate in your new employer’s plan, this will require keeping track of two plans. But it may be the best alternative because IRAs offer nearly unlimited investment choices and often lower fees.