There aren’t many things you can do with your 401(k) when you change jobs, but some choices are better than others.
- Worst choice: Cash out.
If you went to all the trouble of saving money in a retirement plan, the worst thing you can do before age 65 is cash it out. Any distribution will require a 10 percent early withdrawal penalty if you are under age 59. Plus, anything you take will be taxable that year. There is an exception to the penalty if you are losing a job or changing jobs at age 55 or later, but it is still taxed.
- Best choice: Rollover to the new company’s plan. You never get your hands on the money and it never stops growing.
- Good choice: Rollover to an IRA. If you have less than 10 years to work, an IRA will offer a wider choice of safe investments and fixed income options, according to Presley Wealth Management.
- Possible plan: Rollover to a Roth IRA.
Consult an investment advisor before doing this. The downside is that you pay taxes on the money when you take the Roth plan. The upside is you can start tax-free withdrawals at age 59.
- Good option: Leave it where it is.
You won’t be contributing to your old 401(k) if you leave your job, but if you like the current options, consider keeping it where it is. You can roll it over any time