Investment Strategies

A new job brings a lot to think about, and the retirement money you accumulated at your old employer is easy to lose track of. What you do with it matters, because a poor choice can mean extra taxes or a smaller nest egg.

Your main options

1. Leave it in the old plan. Many plans let you keep your balance if it is above a minimum. This is convenient, but you will have to keep track of an additional account, and your investment choices stay limited to the plan's menu.
2. Roll it into your new employer's plan. If the new plan accepts rollovers, this keeps your savings in one place.
3. Roll it into an IRA. An IRA usually offers a wider choice of investments and gives you more flexibility.
4. Take the cash. This is usually the costliest choice.

Why cashing out is risky

Withdrawals from a traditional 401(k) are taxable income. If you are under the age where penalty-free withdrawals begin, you may also owe an additional early withdrawal tax unless an exception applies. Plans must generally withhold a portion for federal tax on a cash distribution, so you receive less than you expect. You also lose years of tax-deferred growth.

How to roll over properly

• Direct rollover: The old plan sends the money straight to the new plan or IRA. No tax is withheld, and this is generally the simplest and safest method.
• Indirect rollover: The check is made out to you. Mandatory withholding applies, and you generally have 60 days to deposit the full amount, including the withheld portion from your own funds, in a new account. Miss the deadline and the amount becomes taxable.

Details to check

• Vesting: Employer contributions may vest over time. Find out how much of your balance is yours before you leave.
• Roth balances: Roth 401(k) money should generally be rolled into a Roth account to retain its tax treatment.
• Loans: An unpaid 401(k) loan may become due or be treated as a distribution after you leave.
• Company stock: Special rules can apply to appreciated employer stock, so ask before rolling it over.
• Fees and investment options: Compare costs in the old plan, the new plan and an IRA.

Before you leave

Ask the plan administrator for a statement and a rollover guide. Update your beneficiary information, and keep records of each rollover for your tax return. You will receive Form 1099-R for the distribution and should report the rollover correctly even if no tax is due.

More information about rollovers is available at irs.gov. If you are changing jobs and want to compare your choices, contact our firm.