Participating in an employer sponsored 401k is one of the very best ways to save for retirement. However, when your employment status changes, you must decide what to do with the 401k funds currently being managed through your previous employer.
The Expensive Option
You can cash out your 401k. However, this is definitely an expensive option.
You’ll have to pay taxes on the funds. Since most 401k plans are pretax, you’ll have to pay taxes on the money coming out of the 401k because you didn’t pay taxes when the money went into the fund.
You will potentially be subject to an early withdrawal penalty. In most cases, if you take your money out of the 401k before you reach 59½, you’ll pay a 10% early withdrawal penalty.
The Risky Option
Leave your money with your previous employer. This could end up being an expensive option.
There are fees associated with managing a 401k account. As an employee, you likely didn’t have to cover any of those fees, but now they could be passed along to you.
Your previous employer may choose to move the 401k accounts to a platform you do not like. If you leave your account there, your ability to influence the investment of your funds may diminish.
The Best Option
Rollover your 401k into an IRA (Investment Retirement Account) or another account that qualifies you for tax benefits when you save for retirement.
When you leave your current employer, take your money with you and put it in an account that continues to be invested for retirement but is now managed by someone you choose to manage your retirement savings.