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Don't leave your retirement savings behind when you switch jobs

Woman carrying a cardboard box, leaving office
JGI/Tom Grill

When you leave a job, you obviously have a lot on your mind.

However, leaving and ignoring your old 401(k) retirement assets is like putting money in a box under your bed and forgetting it's there. You need to create a plan for that money and find ways to reinvest it.

And in these uncertain times, when so many people are leaving or changing jobs, the question becomes more urgent: What should I do with the money in my 401(k) plan from a previous employer

Depending on your personal circumstances and the balance of your 401(k) account, you'll have several options.

If your balance is less than $1,000

If the balance in your previous employer's 401(k) plan is less than $1,000, generally, your only option will be to receive a check for the full amount.

That check must be deposited into your new employer's 401(k) account, or into an individual retirement plan within 60 days of receiving it. If you don't, you could incur tax on the full amount, plus a 10% penalty for early distribution. It's best to speak with your 401(k) plan administrator or human resources office to explore the best way to receive these funds, or how to transfer them (known as a "rollover") to your new 401(k) or IRA.

Be careful: If you don't explicitly communicate your preferences to your old employer, they will likely write a check directly to you, creating more work for you if you wish to avoid penalties and taxes.

 If your balance is between $1,000 to $5,000

If your plan balance is between $1,000 to $5,000, and you don't communicate another preference to your former employer, they may choose to transfer it into an IRA. Generally, the money would be invested in investments that seek to preserve your capital such as a money market fund.

For this same reason, it's wise again to speak with your plan administrator to initiate a rollover transfer to your new employer's 401(k) plan, or to an IRA where you can decide how best to invest the money yourself.

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If your balance is greater than $5,000

If your balance is greater than $5,000, your previous employer will allow you to retain your funds in that 401(k) plan.

However, there are reasons why you may prefer to do a rollover transfer: If your new employer offers a 401(k) plan with better investment options or lower costs, it would be a good idea to transfer the money to maximize your earnings. (Conversely, if your new plan is more expensive, or offers inferior investment options, it may be preferable to leave your money in the old 401(k) plan.)

Also, consider whether you'd prefer to invest your money in an IRA, which will give you almost endless investment options, but will require more skill and management on your part. These can be opened via an online brokerage firm, or at most banks, where you can request assistance in opening an IRA account for the first time.

Finally, remember that you won't be able to take out loans from an old 401(k), or from an IRA account — these only allow you to withdraw funds, which involves paying taxes, and in many cases, a 10% early withdrawal penalty. (Note that taxes are prepaid on Roth IRAs, and any contributions can be withdrawn without penalty in most circumstances.)

If you want to borrow from your 401(k) plan, whether it's to buy or remodel a home, or to pay other significant expenses, you can generally only do so under your current employer's 401(k) plan. So, rolling over the funds may again make sense if you wish to access that money sooner rather than at retirement.

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