This article originally appeared in the financial education center on Prudential.com. For more than 140 years, Prudential Financial has helped individual and institutional customers grow and protect their wealth. Prudential is known for delivering on its promises to its customers, and is recognized as a trusted brand and one of the world’s most admired companies* .
- The fate of your retirement account is in your hands.
- Rolling over the funds can also roll over the tax benefits.
- Cashing out can be an expensive option and leaves you less prepared.
Wherever you are along your career path, a job change can be disruptive, invigorating, or somewhere in between. If you’re exploring retirement, or using your skills in a new way, or simply earning a bigger paycheck, change is on the horizon. In that case, your transition strategy will likely include managing the money in your employer-based retirement plan. Thankfully, there are several options on the table.
Option 1: Leave It in Your Current Account
Some plan providers allow you to leave your retirement account assets behind when changing jobs. This could be the simplest way to go if you’re moving on to a new company.
On the pro side, your account’s tax-deferred status is unchanged. Your investment choices stay the same, and your assets continue to grow until you’re ready to withdraw them (or you reach age 70 1/2 and take a required minimum distribution). The difference is you can’t make any new contributions to your account.
You might consider leaving your retirement account with your previous employer’s plan provider if you’re satisfied with its investment choices, services, and fees. Just keep in mind that you’d still be affected by any major plan changes, such as the removal of certain investment options or a change in the fee structure.
Option 2: Roll It Over to Your New Employer’s Account
One of the job perks your new company may offer is a 401(k) or a similar tax-advantaged retirement account. If you’d rather not have to keep up with two employer-sponsored plans or your new job’s plan is more attractive, a transfer may be the answer.
With this type of transfer, you’re taking the assets from your previous retirement account provider and investing them with a new one. There’s a bit of paperwork involved to complete the process, but there are some definite benefits you might appreciate.
Aside from keeping your savings tax-deferred, you’re able to add to it by making contributions to the new plan. If the fees for the new plan are lower than the old one, that means you’re holding on to more of your returns year over year. Your employer may offer access to financial planning professionals, tools, or resources to help guide your investment and saving decisions. If your plan allows for loans, you’d have a last resort source of cash you could tap in an emergency.
Of course, it’s important to evaluate the new plan before transferring. A transfer may lose some of its appeal if there are fewer investment choices, the available investments don’t exactly align with your goals and preferences, or the plan is more expensive. You’ll also need to know whether transfers from other plans are allowed and what conditions, if any, you have to meet before you can invest the funds.
Option 3: Roll It Over to an IRA
A rollover to an individual retirement account (IRA) is another option and one you might consider if your new employer doesn’t offer a retirement plan. When you roll over into a traditional IRA, your savings are still tax-deferred. Once you reach age 59 1/2, you could make withdrawals without a penalty, only paying income tax on the distributions. You’d also be subject to required minimum distributions once you reach age 70 1/2.
An IRA could offer a broader range of investment choices compared to an employer’s retirement plan. Whether you pay more or less in fees versus your employer’s plan depends on where the IRA is held and what you’ve invested in. Also, multiple employer-sponsored retirement accounts can be consolidated into a single IRA.
One potential downside is that you wouldn’t be able to take a loan from an IRA. While there are some exceptions allowed by the IRS, withdrawals made before age 59 1/2 are generally subject to a 10% tax penalty. That’s on top of regular income tax that applies to the distribution.
Another option is to open a Roth IRA. Qualified distributions are 100% tax-free with a Roth. You would, however, have to pay taxes on the full value of your traditional IRA when you convert, which is something to factor in.
Option 4: Cashing out Your 401(k)
You’re not obligated or required to keep your savings in your retirement account. You could close the account and cash it out. Other options include putting it into a CD or high-yield savings account or using it for something other than retirement. For example, you might have a big home renovation project you’ve been waiting to tackle or your kids’ college tuition to fund.
Having a lump sum of money in hand is nice, but you have to consider the cost of cashing out your retirement account. When you close your account, 20% of your savings is automatically withheld for taxes. That’s not including a 10% early withdrawal penalty you may have to pay if you’re under age 55. If you’re between the ages of 55 and 59, you may be able to take penalty-free withdrawals from the employer-sponsored plan.
You’d also have to account for state income taxes or penalties, as well as any additional federal income tax you might owe if the 20% withholding doesn’t cover your liability. Cashing out could come with a large tax bite, which can shrink your retirement savings. And if you don’t put the money into another retirement plan, that’s less savings you’ll have for the future.
What You Can Do Next
Talk to a Prudential Retirement Counselor about the options you have for your assets and how they align with your larger retirement goals. Review the investment options, services, and fees of your new plan or IRA.
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