During the hustle and bustle of a job change, it's easy to forget about the money you've contributed to your 401(k)."Saving for retirement is a lifelong commitment," says USAA financial planner JJ Montanaro. "When you change jobs, remembering to take care of past investments is part of the commitment."
What choices do you have? You generally have four choices when you leave your employer:
Roll over the funds into a traditional individual retirement account. This way, you have more investment choices and control for professional portfolio management. You may also be able to roll them over to a Roth IRA.
Leave your funds in your old company's plan. You'll no longer be allowed to add contributions, and you may be forced out of the plan if your balance is under $5,000.
Roll over the funds from your "old" 401(k) to your new one. You can directly roll your existing 401(k) into your new employer's qualified retirement plan, but before doing so, make sure the new plan's investment choices meet your needs.
Cash out and pocket the money. Although this is a choice, it is highly discouraged. Keep in mind you won't be able to keep all of the money if you take this route — you'll be hit with income taxes and, unless you've reached age 59½, a painful 10 percent early withdrawal penalty.
An IRA may be your best While you do have a handful of choices, rolling over to an IRA is a popular choice. In fact, according to the Employee Benefit Research Institute, almost 13 times the amount of money is added to IRAs via rollovers than through regular contributions.
"When you weigh the pros and cons, rolling an old 401(k) into an IRA offers the most convenience and flexibility," says Montanaro. "It could make life simpler."
Here's why an IRA may be the best place to park your retirement dollars from previous jobs:
No interruptions. Unless you've already reached retirement, you'll want to keep saving. You can't make contributions to your old company's plan once you leave, but an IRA lets you keep the tax-deferred savings rolling, especially if your new job does not offer a retirement savings plan.
More ways to invest. An IRA allows you to invest your retirement money in virtually any mutual funds, stocks, annuities or other investment opportunities you choose. In a company retirement plan, you may have only a handful of choices.
Greater control. You can choose your own financial services company to manage your IRA, and you don't have to move your money again the next time you change jobs.
One view. A single IRA can be a repository for numerous employer plans started throughout a working life. This approach should help simplify the management and monitoring of the portfolio.
Roth as an option. You may decide to roll over your 401(k) directly into a Roth IRA. You'll have to pay income tax on the taxable portion of the rollover, but you can set yourself up for tax-free income in retirement. You may also be able to contribute to a Roth with after-tax dollars if your income falls below certain limits.