When leaving a job, there are a lot of things you have to remember to do when you leave – clean out your desk, say goodbye to your coworkers and pack up your secret stash of candy, for instance. Another thing you have to do, of course, is take care of your retirement plan. There are several options, and according to a new study from Harvard Business Review, too many people are choosing to completely drain their account and take it in cash. There are a number of reasons why this is not the best option for dealing with retirement funds from a company you are leaving.
For help managing your own retirement savings, consider working with a financial advisor.
401(k) Options When Leaving a Job
When you leave a job, you have four basic options for handling your 401(k):
- Keep it with your old employer. You do have the option of simply leaving your money in the plan at your old company. If you have less than $5,000, it’s worth noting your company can force you to take it or transfer it. Leaving your money with your old company also means when you want to access your funds in the future, you’ll have to deal with a company you may have long since left, which could cause some issues.
- Rollover to an IRA. One of the most popular options in this situation is to take your money out of your 401(k) and put it into an individual retirement account. You can then reinvest in a buffet of options – and you can continue to put money into the account periodically.
- Rollover to a new employer’s plan. There is another rollover option available – taking the money from your old account and putting it into the plan at your new employer. You can then continue to put money into the new plan and have all your retirement savings in one place.
- Cash it out. Your final option – which will be explored more below – is to take the money out in cash.
Harvard Business Review cites data that in a survey of 160,000 employees in the United States between 2014 and 2016, 41.4% cashed out at least some of their 401(k) balance when leaving a job. Furthermore, 85% of those people took out the entire balance.
Generally speaking, this isn’t a great choice when it comes to planning for retirement. If you take money out of your retirement plan, it’s no longer growing in the market, and may not last until you retire.
Why, then, do so many people liquidate their 401(k) accounts when they leave a job? HBR thinks that it’s due to poor communication with people leaving their jobs. Most simply get a letter from their plan’s recordkeeper, and many take the simplest option of taking the money and running.
Picking one of the rollover options is often considered the best option for retirement savers – it keeps your money someplace you have easy access to and lets it keep growing, allowing your nest egg to expand. This puts you in the best position when you retire.
According to Harvard Business Review, too many people are choosing to cash out their retirement savings when they leave a job. In fact, over 40% of people who left their job cashed out a portion of their savings between 2014 and 2016. They’d be better off picking a rollover option, which lets them keep their money in a retirement-focused account.
Retirement Planning Tips
- A financial advisor can help you make the best choices when planning your retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you use a 401(k), make sure you’re taking advantage of any employer match available to you. Your employer’s contributions are free money, which can ultimately help you reach your retirement goals.
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