A new job is a big milestone, but it also brings significant financial decisions—especially when it comes to your retirement savings. Your 401(k) or employer-sponsored plan is vital for your financial future, and your choice now can have long-term effects on your capacity to build and secure your wealth.
Your options include leaving your savings in your former employer’s plan, rolling it over to a new employer, transferring it to an IRA, or cashing it out. While each choice has pros and cons, the best alternative depends on your financial status and long-term goals.
This guide will walk you through the different options available. With this information, you can make an informed decision about what to do with retirement when changing jobs.
What to Do with Your Retirement Account After Leaving Your Job
When transitioning to a new job, you generally have four choices for handling your retirement account. Here’s an overview of each option’s benefits, drawbacks, and suitability.
Option 1: Leave your retirement account with your former employer
When you leave your retirement account in your former employer’s plan, it can continue growing tax deferred. This choice can be practical if your previous employer offers a solid plan with reasonable fees and strong investment options. You won’t have to make immediate adjustments when you keep your account where it is, and your money remains invested without interruption.
However, the downsides of this option can limit your control over your funds, investment choices, and potential restrictions on account management. Tracking and managing your accounts from different employers can be challenging if you switch jobs multiple times.
When this might be a good option: This choice is best if your former employer’s plan has competitive fees and rewarding investment opportunities. It can also be a suitable option if you don’t mind keeping your retirement savings separate from your new employer’s plan.
Option 2: Roll over your retirement account to your new employer’s plan
If your new employer provides a retirement plan, you may roll it over to your old 401(k) or similar accounts. It’s simpler to combine and manage everything in one place. Additionally, you’ll continue to benefit from tax-deferred growth, and employer-sponsored plans can have lower fees than some IRAs.
However, potential downsides of this option include plan-specific restrictions and limited investment options. Some employers also have long waiting periods before new employees can contribute or transfer funds. If your new employer’s plan has higher fees or fewer investment choices, it’s best to skip this option.
When this might be a good option: This option is suitable if your new employer’s plan has attractive investment choices and low fees. You can also opt for this if you prefer the convenience of keeping your retirement funds in one account.
Option 3: Roll over your retirement account into an IRA
Another option is to transfer your retirement account into an Individual Retirement Account (IRA) so you can have greater control over your investments. Unlike employer-sponsored plans, IRAs’ wider range of investment options lets you tailor your portfolio to your financial goals. Depending on the provider, your IRA may also have lower fees than an employer plan.
However, you’ll need to actively make investment decisions or work with a financial advisor with this option. Managing an IRA requires more responsibility, resulting in higher management fees. Additionally, traditional IRAs require minimum distributions (RMDs) starting at age 73.
When this might be a good option: This option is ideal if you want more investment flexibility or prefer managing your portfolio. If your former employer’s plan has high fees and limited investment choices, this option can also suit you.
Option 4: Cash out your retirement account—why it’s usually a bad idea
While it may seem tempting to cash out your retirement account, it is usually not a smart financial decision. Aside from income taxes, withdrawing funds before you turn 59 ½ usually results in a 10% early withdrawal penalty that can significantly reduce the amount you receive.
Additionally, cashing out prevents your money from growing. Then, you lose out on compound interest and other investment gains. Over time, this can create a major setback in your retirement savings, making it more challenging to achieve long-term financial security.
When this might be a good option: If you’re facing a serious financial emergency and have exhausted all other resources, cashing out might be a reasonable option. Otherwise, it’s best to explore other options to increase your retirement savings.
Making Smart Financial Choices When Changing Jobs
It’s critical to decide what to do with your retirement account when changing jobs, as you want to protect your long-term financial future. Whether you leave your funds in your former employer’s plan, transfer to a new employer, or cash out, each option has its benefits and drawbacks. However, the right choice depends on your financial goals, tax situation, and investment strategy.
A Certified Financial Advisor® can guide you through these options and develop a strategy that optimizes your retirement savings. With expert guidance, you can make the right decisions that will help you build and secure your wealth.
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