Can I Leave My 401(k) With My Former Employer?

by J.E. Cornett

When you're switching jobs, it's easy to get so excited about your new job that certain aspects of your old job go by the wayside. The good news is, if the 401k at your former employer gets lost in the shuffle, you're not likely to suffer. However, your unique financial situation will determine whether leaving your 401k behind is the best option.

What Happens to Your 401k at a Former Employer

Whether or not leaving your money behind is an option often depends on how much you have invested in your 401k. If you have less than $1,000 in your 401k, your employer can legally cash your account out after you're gone. If your 401k account has between $1,000 and $5,000, most employers will roll your money over into an IRA automatically when you leave. If you've got over $5,000 in your 401k, it's up to you to decide whether to leave your money or roll it over into another retirement account, or to cash it out.

Why Leave Your Money Behind?

Depending upon your options, it may be a good idea to leave your 401k at a former employer. If you are nearing retirement, there may be no financial gain by moving your money. Likewise, if you are near or above the age of 55, you may want to leave your money alone, due to the fact that the IRS is more lenient about 401k withdrawals after age 55. One other benefit is the fact that employer-sponsored 401k plans are protected from creditors; in the event you file bankruptcy or are the recipient of a summary judgment from a creditor seeking recourse, your money is protected in a 401k, while IRAs often do not offer this protection.

Why Take Your Money?

If you are nowhere near retirement, it may be best to take your money with you. If your former employer's 401k plan is heavy on stock options, or if your former employer is a small company with high investment fees, it may be wise to roll your old 401k into your new employer's plan or into an IRA, provided that your new employer's plan is preferential, or that the fees and taxes for the IRA you choose will result in substantial savings versus leaving your money alone.

What Not to Do

If there's one option that will always be worse than leaving your 401k with your former employer, it's cashing out your retirement. Your savings take a big dent after you pay taxes and fees on the money.

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