New Job? Don’t Leave Your 401(k) or 403(b) Behind

You’ve just accepted a job at another company and you’re probably focused on the opportunities and challenges ahead. Before you devote all your time and energy on making a positive first impression, find the right place for your 401(k) or 403(b). Fortunately, you have several options.

First of all, if your account has less than $5,000, ask your former employer what their standard procedure is so you can determine your next step.

If you have at least $5,000 in your account, you may be able to:

1. Leave the money in your current plan
2. Transfer the account to your new employer’s plan
3. Roll the 401(k) or 403(b) over to an Individual Retirement Account (IRA)
4. Cash out (Subject to taxes and early withdrawal penalties)

Let’s examine the pros and cons of each option.

Leave It

An easy choice may be to leave the 401(k) or 403(b) account at your former employer. If you are moving from a large company to work for a smaller business, it may make sense to leave the account where it is. Generally, administrative fees for 401(k)s and 403(b)s decline steadily as retirement plan assets rise, so fees may be lower at larger employers.

If the former employer had a wide variety of investment choices compared to your new employer, remaining in your current plan may be advisable.

Lastly, if your new employer doesn’t offer a 401(k) or 403(b) plan, remaining in the old plan is one way to keep your retirement assets growing on a tax-deferred basis.

However, keep in mind that Americans tend to stay at the same company for an average of 4 years. After a 30-year career, you could have several 401(k) or 403(b) retirement accounts at several companies to manage.

Transfer It

If you are interested in consolidating assets and having one “home” for your retirement funds, you might want to transfer the 401(k) or 403(b) account to your new employer, if allowed. This might be financially beneficial if you are joining a company with a 401(k) or 403(b) plan that has more plan options and potentially lower fees.

Roll It Over

A more common way to consolidate your retirement account is to roll it into a Roth or Traditional IRA. Generally, an IRA provides more investment choices than a retirement plan. However, make sure to evaluate the potential tax implications associated with Roth and Traditional IRA rollovers.

Taking the IRA path requires choosing between a Traditional IRA and a Roth IRA. With a Roth IRA, you are contributing post-tax dollars; a Traditional IRA uses pre-tax contributions. Roth IRAs tend to appeal more to younger people who generally are in lower tax brackets. The idea is that you pay the taxes on the contributions now and future earnings can be withdrawn tax-free, provided conditions are met.

Cash It Out

Due to taxes and early withdrawal penalties, financial professionals generally do not recommend this course of action. Consider the following representative example:

Assume you have $5,000 in your 401(k) plan, you’re 27 years old and you’re in the 25% Federal tax bracket. Also assume your state tax rate is 5%. If you decide to cash out, you will receive only $3,000 after you pay the 10% penalty of $500 and ordinary income taxes of $1,500.

The Bottom Line

Beginning a new job is exciting; however, your financial future is just as significant. Make sure you ask questions, understand the pros and cons of each, and gather the information you need to help you make the right decision.

Need help in the decision-making? Let the experienced Financial Advisors at Jemma guide you through the process.