Don’t forget to take your 401(k).
One of the most important loose ends to tie up when changing jobs is your retirement account. The actions you take - or fail to take - can result in tens of thousands of dollars in lost savings. Regardless of why you leave, you’ll want to take action when you receive a package from the plan administrator asking what to do with the money in your account. Here’s an overview:
■Cash out: If you don’t have any immediate job prospects, the temptation to cash out is powerful, especially if you’re young. It’s easy to assume you’ll just catch up later. But an immediate payoff comes at a price. Your employer will take 20 percent in withholding taxes off the top. If you’re in a high tax bracket, you’ll need to pay any income tax you owe beyond the 20 percent when it comes time to file your return. The money will also be subject to a 10 percent early withdrawal penalty if you’re younger than 59. So think through whether the costs are worthwhile.
■Roll over: If you have another job lined up, it may seem like a no-brainer to have your old 401(k) money rolled over directly into your new plan. But you’ll want to examine the new program.
“It shouldn’t be an automatic decision,’’ said Gil Charney, an analyst with The Tax Institute at H&R Block. You may find, for instance, that the investment options aren’t as numerous or of the same quality as with your previous plan. Or if you’re going to work for a small company, you may be reluctant to roll over a sizable 401(k) account until you’re more certain of your career path.
If your next gig doesn’t offer a 401(k) - or you just want a little more flexibility with your investments - you can roll the money into an individual retirement account, or IRA.
The upside of an IRA is that it gives investors more options than a 401(k). For instance, an IRA can be spread over a mix of CDs, stocks, and funds. You also have the freedom to transfer IRA accounts from one brokerage to another, although you might incur transfer fees.
The annual contribution limit for an IRA is $5,000, or $6,000 if you’re 50 or older. That’s compared to $17,000 for a 401(k) account; those 50 and over can kick in an extra $5,500 to catch up on retirement savings.
Also keep in mind that many companies match 401(k) contributions, to a point.
■Keep the status quo: You don’t have to decide right away. The account will remain intact as long as you have at least $5,000 saved up. You won’t be able to make additional contributions, but you can still monitor the account and adjust the plan allocations. This might be your plan of action if you expect to have another job with a 401(k) in the near future and don’t want to put the money into an IRA. If there’s between $1,000 and $5,000 in the account, the company can opt to roll the money into an IRA. If you have less than $1,000, the company can cash out the account and cut you a check.