With unemployment at historicly high levels, a lot of people find themselves changing jobs. If you are one of them, be sure to think about any 401(k) that you might be leaving behind at your old employer.
The money in your 401(k) is your money, not your employer, and you are entitled to it, even after you leave your employer. When leaving your job, you four options for your 401(k):
- Leave the money in your previous employer’s pension plan.
- Roll over the money to your new employer’s pension plan.
- Roll over the money into an IRA.
- Withdraw the money in your 401(k).
When deciding which option to choose, here are some things to think about:
Borrowing from your 401(k). If you want to borrow money from your employer-sponsored 401(k) account in the future, consider rolling the money into your new employer’s 401(k) plan. While you can borrow money out of your 401(k), that option is not allowed with an IRA. And if you leave your 401(k) at a former employer, they often will not let you borrow funds if you are not currently employed.
Withdrawing the money. This year may be a good time to make a withdrawal from a retirement account. In a normal year, when you make an early withdrawal from a retirement account, you owe income taxes on the amount of the distribution plus a 10% early withdrawal penalty. In 2020, this 10% penalty has been suspended. So while you’ll still pay taxes on the distribution, you may be able to avoid the early withdrawal penalty.
Invest the money. While it might be tempting to borrow or take an early distribution from your retirement account, you’ll also be depleting future earnings intended for your retirement years. So consider whether you truly need the money now to pay for an emergency or if you’re ok leaving it in your 401(k).
Whatever you decide, it is always best to transfer the funds directly from one retirement account to another. This direct transfer eliminates the possibility of your fund movement being characterized as a distribution subject to income tax. If in doubt, ask for help.