How will quitting my job affect my 401k?
FAQ: How will quitting my job affect my 401k?
Answer: Leaving your job isn’t the only decision you need to make, you also need to decide what to do with your 401(k) account. Some employers will allow you to keep your savings in the company plan, while many require that former employees move their balances out. Either way, the most important thing you can do to ensure that the 401(k) won’t be hurt is to make sure that money stays in a tax-advantaged account.
When it Makes Sense to Stay in my former Employer’s 401(k)
Many companies don’t offer this option. If your former employer does, it may make sense to keep the 401(k) balance in the company’s plan if it offers a diversified array of low-cost investment options that cover a number of different asset classes and management styles.
Because there is some paperwork and effort involved in completing a rollover, keeping your money in the plan can help you avoid that headache while keeping your balance in a tax-advantaged account.
When It Makes Sense to Rollover into an IRA
Generally, rolling your 401(k) balance into an individual retirement account (IRA) is the better option. When you roll a 401(k) balance into an IRA, you have thousands of mutual funds, exchange-traded funds (ETFs), stocks and bonds to choose from. Whereas, your workplace 401(k) plans tend to offer options that are either limited, high-cost, poor-performing or missing from certain asset classes. Completing a rollover into an IRA can eliminate all of those problems.
Why You Shouldn’t Withdraw the Balance Entirely
There are several reasons why you shouldn’t just cash out a 401(k). The biggest one being the immediate tax consequence. If you cash out your 401(k) before you turn 59.5, any withdrawal gets immediately taxed and incurs a 10% early withdrawal penalty from the Internal Revenue Service (IRS).
The other major reason not to withdraw your money from a 401(k) is that it loses the chance to continue growing on a tax-deferred basis. And it also loses the benefits that come from the longer-term power of compounding. The only choice that can really hurt a 401(k) when you quit your job is if you choose to cash out the balance entirely.
