If you've recently left your employer, you may have forgotten something crucial when you cleared out your office and said your goodbyes: your 401k. It's common for 401k accounts to be left behind at previous workplaces because employees forget about them or don't take the initiative to re-invest them in something else. While there are typically no major repercussions to leaving your old 401k where it is, there are better ways you can make the money work for you.
Deciding to keep your 401k at your previous workplace has only one true advantage: it gives you time to research options and decide what to do with the money. If you decide to leave your 401k with your previous employer, make sure you check into the required minimum for the account and ensure that you have enough funds. While most plans do not allow you to roll a new 401k plan into a former one, some do; if you like the plan and this is an option, you could feasibly keep the 401k with your old company.
If you worked for a small company during your last job, you should move the money in your 401k as quickly as possible as you are likely paying large maintenance fees to keep the account. Another problem with keeping money in an old account is that once you stop working for the company and are not on its payroll, you can no longer contribute to your plan. You'll also need to contact your employer to stay abreast of any changes in record keepers and make sure you know where your plan has moved.
Other Options: Cash In
Cashing in your plan is probably the worst option available. If you cash it in, you will have to pay taxes at your current income tax rate, plus another 10 percent penalty if you are under 60 years old. Once you cash out instead of moving the money into your new employer's plan, the investment isn't making you any money. If you mistakenly take the money out, you have 60 days to roll it over into an IRA. You will still pay taxes for withdrawing funds, but at least your money will be put to good use.
Other Options: Rollover to New 401k
One of the best things you can do with an old 401k is to roll it into your new employer's plan. You won't be charged any penalties for doing so, so you will keep all of the money you have saved. Sometimes there is a required waiting period for this option, so make sure you leave your money in the old account until you can roll it over.
Other Options: IRA or Roth IRA
Rolling your old 401k into an IRA is one of the best options. If you roll it directly into the IRA, you will not be charged any penalties or taxes. IRAs also offer more investment choices and fewer restrictions than 401k accounts in regard to contributions. If you roll your 401k over into a Roth IRA, you will pay taxes if you have not yet been taxed on the 401k account.
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