What to do with a 401(k) from a former employer

Changing jobs does not change who owns your 401(k). The money you contributed is yours, along with any employer contributions that have vested. What changes is that you now have a decision to make. According to the IRS, people leaving a job generally have four options for a 401(k) balance.

1. Leave the money in the old plan

Many plans let former employees keep their account where it is. This may be reasonable if you like the plan's investment options or the plan has low fees. You can usually still change investments, but you can no longer contribute, and you remain subject to that plan's rules and costs.

Two things to check: whether your plan requires small balances to be moved out, and whether you will realistically keep track of the account. Old accounts are easy to lose sight of after an address or email change.

2. Roll it into a new employer's plan

If your new employer offers a retirement plan, it may accept a rollover from your old one. Plans are not required to accept rollovers, so ask the new plan's administrator first. Combining accounts can make your savings easier to follow. Before you move, compare the new plan's investment options and fees with the old plan's.

3. Roll it into an IRA

An individual retirement account (IRA) is an account you open yourself, separate from any employer. Rolling a pre-tax 401(k) balance into a traditional IRA generally keeps the money tax-deferred. IRAs typically offer a wide range of investments, and costs vary depending on the provider, the investments you choose and whether you pay for advice.

You can also roll a pre-tax balance into a Roth IRA. In that case the untaxed amount is included in your income for the year of the rollover, so it is worth understanding the tax bill before you choose that route.

4. Cash it out

You can ask for a lump-sum payment. This is the option with the most immediate cost. You will likely owe income tax on any amount that has not been taxed before, and you may owe an additional 10% early distribution tax unless an exception applies. The plan also generally withholds 20% of the payment for federal income tax. Money taken out now is also money that is no longer invested for retirement.

What to compare before you decide

• Costs. Look at the total fees in each option: plan fees, fund expenses and any advisory fees.
• Investment choices. Some plans offer a short, low-cost menu. IRAs usually offer more choice, which may or may not matter to you.
• Withdrawal rules. Some rules differ between employer plans and IRAs. For example, the exception to the 10% additional tax for people who leave a job during or after the year they turn 55 applies to employer plans, not to IRAs.
• Special situations. An outstanding plan loan, company stock held in the plan, or both pre-tax and Roth money in the same account each come with their own rules.
• Help and services. Consider how much guidance you want and what it costs.