According to the latest news account and financial experts in the field, you have four alternatives available to your when you leave a company that participated in a 401(k).
- You can cash out your 401(k).
If you cash out on your plan, you are subject to taxation on the contributions you made into the plan. You will also suffer a penalty for early withdrawal. If you choose this option, you can reduce your investment by as much as 50%. Unless you are facing a financial crisis, this is not the best choice to make.
- Leave your money in your old company’s 401(k) savings plan.
This option, while viable, does have its drawbacks. For instance, since you are no longer with the company, you are not eligible for matching contributions.
- Roll your 401(k) from your previous employer to a qualified plan in a new company.
This alternative may seem attractive, particularly if your new employer matches contributions. However, 401(k) plans may carry higher fees than other kinds of investment options – charges that can lower the influence of your own contributions as well as the contributions made by your new employer.
- Roll over your 401(k) into an IRA.
A rollover IRA permits you to transfer your retirement funds from a 401(k) into an investment with possible strategic benefits. However, you cannot combine an IRA and 401(k) funds with Roth 401(k) and Roth IRA funding. Therefore, make sure you consider the specifics of the individual plans before making a move.
The last strategy is the most advantageous if you want to make the most of your retirement savings. You may also consider executing one rollover per 12 months between multiple IRAs that you possess, if that is your situation.
Rollover IRAs offer several advantages that are not available through 401(k) type plans. First, a rollover from a 401(k) into an IRA continues to defer your taxes on your retirement contributions. Although you are responsible for reporting such a rollover to the IRS, the proper execution of a rollover does not feature consequences tax-wise.
Another benefit of a rollover to an IRA is its simplicity. Instead of tracking your investments through a variety of financial statements, a rollover IRA account gives you the latitude to keep on track of your investment account through a single statement.