Whenever you decide to leave your job, you generally have four options for your 401(k) money:
1. Leave it there.
2. Roll it over into your new company’s 401(k) plan.
3. Roll it over into your IRA.
4. Take the money and run.
Choosing number 4 will never be the right move, as you’ll pay massive taxes, probably penalties, and receive significantly less dollars in your pocket that your ending plan balance. Furthermore, you’ll have a whole lot less growing for your retirement. So cross out number four.
Of course, that still leaves options one, two, and three, all of which are acceptable.
If you leave your old job and don’t move your money, in most cases you effectively choose option 1. However, you can still choose another option later. There is no deadline. However, if your plan balance is too low, you might not have the “do nothing” option. In this case, you must choose another option quickly, or your former employer might choose the complete distribution (option # 4) on your behalf, which would qualify as a big mistake.
Assuming your 401(k) money is still at your former employer, a few advantages exist to rolling over your 401(k) plan into an IRA. One benefit is the virtually unlimited investment options. When your money is in the 401(k) plan, your only choices are the investment options available from your employer’s 401(k) plan. This distinction is especially important if you desire additional investment options.
Another plus of an IRA rollover is simplification. Since you might have several jobs during your career, you might participate in several 401(k) plans. If you leave your money in each of these accounts, you have money all over the place. It is easy to lose track of these accounts as the years and decades go by.
Whenever you leave your job, I suggest either rolling over your 401(k) plan into your new employer’s 401(k) plan or rolling it over into an IRA. Doing so helps simplify your life because it gives you one less account to keep track of (if you leave it behind.)
Simpler is better because simpler gets done. Move your money where you know you will keep your eye on it. Invest an hour of time to roll over your 401(k) the right way when you leave your employer, instead of spending days trying to figure it out a few years later. Now that’s living Beyond Paycheck to Paycheck.
