Protecting Your 401(k)
How to keep your money working hard.
Our two cents
Our two cents
You have many options when deciding what to do with your 401(k) after leaving a job. Just remember that withdrawing your money before you turn 59½ may cost you a penalty.
Your assets in a 401(k) retirement savings plan are portable when you leave a job—but what should you do with them? A rollover to an IRA is one way to go, but you should carefully consider your options before making a decision.
Roll over the assets to your new employer's 401(k) plan
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Pros
- Your money can continue to grow tax-deferred.1
- Under federal law, assets in a 401(k) are typically protected from claims by creditors.
- You may have access to investment choices, distribution options, and other services that are not available in your former employer's 401(k).
- Your new employer's plan may have lower administrative and/or investment fees and expenses than your former employer's 401(k).
- You may be able to borrow against the new 401(k) if plan loans are available.
- Required minimum distributions (RMDs) may be delayed beyond age 70½ if you're still employed with this specific 401(k) plan.
- Your money can continue to grow tax-deferred.1
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Cons
- You may have a limited range of investment choices in the new 401(k).
- Fees and expenses could be higher than they were for your former employer's 401(k).
- Rolling over company stock may have negative tax implications.
- You may have a limited range of investment choices in the new 401(k).
Roll over the assets to a Traditional IRA
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Pros
- Your money can continue to grow remain tax-deferred.1
- You may have access to investment choices, distribution options, and other services that are not available in your former employer's 401(k).
- You may be able to consolidate several retirement accounts into a single IRA to simplify management.
- Your IRA provider may offer additional services, such as investing tools and guidance.
- Your money can continue to grow remain tax-deferred.1
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Cons
- Depending on the IRA provider you choose, you may pay annual fees or other fees for maintaining your IRA, or you may face higher investing fees, pricing, and expenses than you would with a 401(k).
- Some investments that are offered in a 401(k) plan may not be offered in an IRA.
- Your IRA assets are generally protected from creditors only in the case of bankruptcy. This is subject to certain limits. State rules govern IRA creditor protection.
- Rolling over company stock may have negative tax implications.
- Whether or not you're still working at age 70½, RMDs are required from Traditional IRAs.
- Depending on the IRA provider you choose, you may pay annual fees or other fees for maintaining your IRA, or you may face higher investing fees, pricing, and expenses than you would with a 401(k).
Roll over the assets to a Roth IRA
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Pros
- You can roll Roth 401(k) contributions and earnings directly into a Roth IRA tax-free.2
- Any additional contributions and earnings can grow tax-free.2
- You are not required to take RMDs upon reaching age 70½.
- You may have more investment choices than what was available in your former employer's 401(k).
- Your Roth IRA provider may offer additional services, such as investing tools and guidance.
- You can consolidate multiple retirement accounts into a single Roth IRA to simplify management.
- You can roll Roth 401(k) contributions and earnings directly into a Roth IRA tax-free.2
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Cons
- Any 401(k) assets that are rolled into a Roth IRA are subject to taxes and early withdrawal penalties at the time of conversion.
- You may pay annual fees or other fees for maintaining your Roth IRA at some companies, or you may face higher investing fees, pricing, and expenses than you did with your 401(k).
- Some investments offered in a 401(k) plan may not be offered in a Roth IRA.
- Your IRA assets are generally protected from creditors only in the case of bankruptcy. This is subject to certain limits. State rules govern IRA creditor protection.
- Rolling over company stock may have negative tax implications.
- Any 401(k) assets that are rolled into a Roth IRA are subject to taxes and early withdrawal penalties at the time of conversion.
Leave the assets in your former employer's plan
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Pros
- No immediate action is required and you retain the ability to roll over to an IRA or new employer's plan at a later date.
- Your money can continue to grow tax-deferred for retirement.1
- You may have access to investment choices, distribution options, and other services that are not available with a new 401(k) or an IRA.
- Your former employer's plan may have lower administrative and/or investment fees and expenses than a new 401(k) or an IRA.
- Under federal law, assets in a 401(k) are typically protected from claims by creditors.
- You may be able to take a partial distribution or receive installment payments from your former employer's plan.
- If you leave your job in the year you turn age 55 or later, you may be able to take penalty-free withdrawals.
- No immediate action is required and you retain the ability to roll over to an IRA or new employer's plan at a later date.
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Cons
- The fees and expenses for your former employer's 401(k) may be higher than those for a new employer's 401(k) or an IRA.
- Range of investment choices and your ability to transfer assets among funds may be limited.
- You can no longer contribute to your former employer's 401(k) plan.
- Managing savings in multiple plans can be complicated.
- If you hold stock in your former employer in the plan, you may have special tax or financial planning options. You should consider before rolling over your assets to a new employer's 401(k) or an IRA.
- The fees and expenses for your former employer's 401(k) may be higher than those for a new employer's 401(k) or an IRA.
Take a cash distribution
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Pros
- Having the cash could be helpful if you're facing extraordinary financial need.
- If separating from service in the year you turn 55, the 10% early withdrawal penalty does not apply.
- Having the cash could be helpful if you're facing extraordinary financial need.
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Cons
- Withdrawals before age 59½ may be subject to a 10% federal tax penalty in addition to ordinary income taxes.
- Your money will no longer grow tax-deferred.1
- Withdrawing your money may impact whether you have enough for retirement.
- Lump sum distributions are subject to mandatory 20% federal withholding and may be subject to mandatory state withholding.
- A large distribution can bump you up into a higher tax bracket and increase your taxes.
- Withdrawals before age 59½ may be subject to a 10% federal tax penalty in addition to ordinary income taxes.
1. With a tax-deferred investment, your earnings can grow tax-free until you withdraw them. This means that instead of paying taxes on returns as they grow, you pay taxes only at a later date. IRAs and deferred annuities are common tax-deferred investments.
2. Tax-free withdrawals of earnings are permitted five years after the first contribution that created the account. Once the five-year requirement is met, distributions, if taken in the following circumstances, will be free from federal income taxes: after age 59½, on account of disability or death, or to pay up to $10,000 of the expenses of purchasing a first home. Withdrawals that do not meet these qualifications will be subject to ordinary income taxes and a 10% federal tax penalty.
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