Your 401(k) is probably a big chunk of your retirement savings, so it’s important to weigh all your options and pick the one that makes sense. For the most part, your first option is to rollover your 401(k) savings into an IRA; this gives you maximum control of your money while offering more investments choices than you would typically find within a qualified retirement plan.
One of the main differences between an IRA and a 401(k) is that with a 401(k), the employer chooses the investment options and establishes the rules, which typically vary from plan to plan. With an IRA, you’re in charge. You can choose to invest in as many mutual funds, stocks and bonds as you want. In addition, with an IRA, you can name any beneficiary you wish. In a 401(k), you can name someone other than your spouse as the primary beneficiary, if your spouse signs off on the name. Another important difference: federal law offers more protection from creditors for money held in 401(k) accounts than in IRAs.
Another option you might have for what to do with your 401(k) when you leave a job is to roll your old 401(k) into your new employer’s 401(k) plan. Once you are sure that you are staying at your new job or as soon as you’re allowed and if it’s acceptable, it’s usually beneficial to roll your old 401(k) into your new employer’s 401(k) plan. This can make managing your retirement savings much easier since you will only have the one account to monitor. If the new plan does not accept rollovers, you can roll your 401(k) into an IRA and start contributing to your new 401(k) as soon as you become eligible. What’s fun about getting into a new 401(k) plan is the new range of investment choices you will be able to consider.
Lastly, you can probably keep your money in your former employer’s plan for a bit, which shouldn’t be a problem if you have at least $5,000 in that account. However, be sure to double check on how long you can keep it parked there. In most cases, you’ll get 30 to 90 days. It’s likely you won’t want to keep it there longer than that anyway for a few reasons: you won’t be able to contribute to it; extra maintenance fees might be assessed; and, your access to it might become limited. Even though you are comfortable with the way the plan works and your money continues to grow tax-deferred, there will be new rules once you are no longer an employee. Make sure you understand those rules.
If you choose to rollover your 401(k) into an IRA or to go with your new employer’s plan, make sure that the check is made payable to the receiving financial institution. DO NOT have the check made payable to you as this would be considered a distribution where taxes and a penalty may apply. This ensures you get the full value of your former account. If the check is sent to you, be sure it is deposited into the new account because there are rules for how long the money can sit before it must be deposited into another tax-advantaged account.