Whether you were diligent about contributing to your 401k or were only able to set aside a bit of money each month, the money you’ve contributed and any interest earned is yours even after you leave a company. You have several choices when it comes to what to do with that money, so choose what works for you.
Keeping It There
One of your options is to simply do nothing. The money can stay in your current 401k and still grow as you expected it to do. If you plan to take this option, continue to monitor your investments on at least a yearly basis. If your investments aren’t working out, you’ll want to change them. Note, though, that there are management fees for the 401k accounts and you will still be paying these. If you have several different accounts, such as an IRA and a 401k with your new employer, your paying fees on all the accounts and it may be smarter to combine. Additionally, some companies will automatically cash out a plan that has less than a certain amount of money in it, which can earn you penalties and fees.
Many employers make matching contributions to employee 401k accounts, but these contributions are not always fully vested immediately. Typically, the money truly becomes yours only after working for the company a specified amount of time. If you worked for the company less than this, then the company will take back this portion of the money in your 401k.
Rolling over the money into an IRA or a 401k with your new employer is a popular option. It combines your accounts, making it easier for you to manage your investments. If you plan to do this, the 401k holding company must send the payment directly to the new account. If it passes through your hands, you may have to pay taxes and penalty fees on the money.
CBS Money Watch reports that nearly half of employees who leave a job receive the money in the 401k as a lump sum payment. Doing this incurs a 10 percent penalty if you are under age 55. You also have to pay taxes on the money that you receive. You also lose on potential earnings that you might have had if you had kept the money in the account.
I don’t recommend this option! But if you must cash out, use the money for something smart, such as buying a new home outright, then use the money you would have saved on mortgage payments to refund your retirement accounts.
What did you do with your 401k after you left the last company you worked for?