If you've invested in your employer's 401(k) retirement plan, here are four things you can do with your funds when you leave. See which is right for you.
Option 1: Leave funds where they are
Depending on your former employer, this may or may not be an option. If you are able to leave your funds there, they will continue to grow tax-deferred as they had been doing. However, it may be less convenient to manage your money if you have more than one retirement account.
Option 2: Roll over to your new employer's plan
If this is an option, the move could be relatively seamless and allows your funds to continue growing tax-deferred. You'll need to talk to the plan administrator to discuss your options.
Option 3: Roll over to an IRA
This option allows your funds to grow tax-deferred, and may give you more investment options than a 401(k) plan. If you choose a Traditional IRA, you won't pay any taxes when you roll over the money. If you roll money into a Roth IRA from a Traditional 401(k), you'll be taxed on the money going into the account, but pay no federal income taxes when you withdraw the money (after you're age 59 1/2 and have had the account open for five or more years). Money from a Roth 401(k) can be rolled into a Roth IRA tax-free.
Option 4: Cash out the account
Cashing out is rarely a good choice, and you should consult with your tax advisor before doing it. It typically means you'll pay federal and state taxes, and if you're younger than 59 1/2, you may have to pay a penalty tax, and sacrifice a substantial portion of your savings.
What are your next steps?
Clearly, there are many considerations in deciding what to do with your retirement account. Check with your financial advisor for your particular retirement needs.
Prior to rolling over assets from an employer-sponsored retirement plan into an IRA, it's important that customers understand their options and do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees, and any potential penalties.
Neither State Farm™ nor its agents provide tax or legal advice.