During the excitement that comes with taking a new job, make sure you don't forget about the retirement money you socked away in your former employer's 401(k) plan.
"People in their working years tend to switch jobs a lot and can lose touch with their [accounts]," said Kristi Sullivan, a certified financial planner and owner of Sullivan Financial Planning. "That can get messy after several job changes."
Although leaving the money in the legacy 401(k) might be possible, there are three other options for your nest egg: Move it to your new employer's plan if permitted, move it to an individual retirement account, or cash it out and pay a penalty. Additionally, if you have company stock in your 401(k) plan, separate rules apply.
Financial advisors say that while each scenario comes with pluses and minuses, the ideal choice depends on your individual circumstances. Here's a look at your options.
Workers these days spend fewer than five years at a job, according to the Bureau of Labor Statistics. Moreover, about 29 percent of workers age 25 or older remain with the same company for at least 10 years.
So clearly, job-hopping is the new norm. But, say advisors, racking up a collection of 401(k) accounts should not become a standard.
"I've found in way too many situations that when workers leave [the 401(k) money] where it is, both employees and employers lose track of each other," said Lenard Cohen, a CFP and investment advisor with CF Services Group.
Indeed, Cohen has a client who is struggling to tap a six-figure 401(k) account from a company he left 25 years ago.
The company went out of business, which means the 401(k) plan is no longer in existence. So while the account exists with a custodian, accessing the money is an aggravation for both Cohen and his client.
"We've received verification that the money is there — it's been growing and has performed all right — but the [custodian] isn't prepared to release the money, because we can't find anyone who is authorized to release it," Cohen explained.
Additionally, say advisors, there's another downside: losing track of your asset allocation.
"It's hard to know what your investment mix is if you have different accounts all over the place," said Sullivan of Sullivan Financial Planning.
However, there is one time that advisors say it often makes sense to leave your money in the old employer's 401(k): If you are not yet age 59½ — when legally you can tap a 401(k) or individual retirement account — but are at least age 55.
That's because the so-called Rule of 55 allows you to take withdrawals from your 401(k) penalty-free if you leave the workforce in the year you turn 55 or later. If you move the money to an IRA, you lose that ability.
"If you're going to retire early and you're at least 55, it might make sense to leave the money there," Sullivan said.
Moving your 401(k) plan money to a new employer's retirement plan or to an IRA is called a rollover.
"These are generally the two good choices," said Cohen at CF Services Group. "It works if you're moving to a company with a robust 401(k) plan or to an IRA and can invest in [almost] anything, including low-cost index funds."
If your new employer's 401(k) plan accepts rollover contributions from an old plan, it can make sense to do it because you are consolidating your retirement assets and can better manage your investments.
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You also can move your 401(k) plan money to a rollover IRA. If done properly, it's a tax-free event.
But again, be aware of the different rules applying to 401(k) plans and IRAs.
One advantage to moving 401(k) money to an IRA deals with distributions if you are in retirement, Sullivan said. All 401(k) distributions include a 20 percent withholding for taxes whether or not you actually owe that much at tax time. With an IRA, she said, you can control the amount of tax withholding.
It's a rare circumstance where a financial advisor would recommend taking an early distribution from your 401(k).
Be aware that companies are permitted to kick you out of their 401(k) if your account's value is below $1,000. If they cut you a check, they automatically will withhold 20 percent of it for taxes. If you cash the check, you will also pay a 10 percent penalty for accessing the money before age 59½.
If between $1,000 and $5,000 is in your former employer's 401(k) plan, the company can still give you the boot. But it must put the funds in a rollover IRA for you.
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For the majority of people, taking the distribution early rarely makes sense. Not only will you pay taxes on the money and the penalty (in most situations), you will also lose out on letting that pretax retirement money grow.
"The fourth choice — withdrawing the money — is almost always a bad decision," Cohen said.
If you have company stock in your 401(k) and leave your job, you can take advantage of what's known as the net unrealized appreciation strategy.
Say you paid $1,000 for shares of your company's stock and the value is now $5,000. The difference — $4,000 — is the gain.
Investment gains are taxed either as short-term (held less than a year) or long-term. Short-term gains are taxed at your regular income-tax rate. Long-term gains are taxed differently.
If you roll over your company stock to an IRA, be aware that all distributions from an IRA will be taxed as ordinary income, whether they involve company stock or not.
Alternatively, say financial advisors, you can move your 401(k) company stock to a taxable brokerage account and take advantage of long-term-gain tax rates, which generally are lower than ordinary income-tax rates.
If you do this, you immediately pay income taxes on the original cost of the shares — the cost basis — which in the above illustration is $1,000.
The gain, however, is not taxed until you sell the shares, whether it's the next day or years later. And then the gain is taxed as long-term. That means you pay less in taxes on the gain than you would if you had put the company shares in a rollover IRA.
"It only makes sense to do this if you're invested in company stock that has increased substantially," said Joel Gemmell, a CFP and vice president of wealth management for McLean Asset Management.
Regardless of your situation, the most important aspect of taking care of your old 401(k) accounts is making sure don't lose track of them.
"For most people truly saving for retirement, I believe in consolidating assets in one account," said Cohen. "That's how they will know where all their assets are."
— By Sarah O'Brien, special to CNBC.com