Not sure what to do with your 401(k) if you've changed jobs? Here are your options

Here's what you need to know about moving money out of your old employer's 401k.
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Some things you need to keep in mind are the tax implications, since 401(k) contributions are taken out of your paycheck pre-tax, and the timing.Torwaistudio / Shutterstock
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By Michelle Fox, CNBC

There are a lot of things to think about when you switch jobs, including what to do with the money you may have accumulated in your employer-sponsored retirement account, or 401(k).

In fact, that is the most important thing you need to decide, according to Ted Benna, who’s been dubbed the creator of the 401(k) about 40 years ago.

The key is to not get overwhelmed.

“When you change your job, you’re going to be given a lot of information that explains the options that you have available to you with your 401(k) retirement savings,” said Benna, a 401(k) consultant who has authored five books, including “401(k) for Dummies.”

Some things you need to keep in mind are the tax implications, since 401(k) contributions are taken out of your paycheck pre-tax, and the timing. By law, you must have at least 30 days to decide what to do with your plan if you change employers. Also, once you get your distribution, you have 60 days to get it deposited into another qualified retirement account before being penalized.

So how do you decide the right move for you? Here are the options available.

Leave the money where it is

You can always decide to do nothing. You won’t lose your contributions, or your employer’s matching contributions if you’re vested, by leaving your money in your old plan.

It maintains its tax-deferred status, but you lose your ability to add to it.

Take the money in a lump sum

You are certainly free to cash out your 401(k) when you leave your job.

However, if you want to do something with the money — like taking that dream vacation — you need to first have to ask yourself whether you want to “work forever,” Benna said.

“If you blow your retirement savings when you’re age 30 ... that means you’re going to have to work a heck of a lot harder to be able to accumulate what you need for retirement later on,” he added.

To determine what you will need, experts recommend using a retirement calculator. For many Americans, that magic number seems to be $1.7 million, according to a recent survey from Charles Schwab, which looked at 1,000 plan participants nationwide.

However, there’s more than just lost savings at stake.

For one, if you take that lump sum, it will be taxed as income when you file your next tax return, since the money was originally taken out of your paycheck pre-tax.

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Plus, if you take the money out of the account instead of rolling it into another retirement plan before the age of 59½, you’ll be slapped with a 10% tax penalty.

Certified Financial Planner Zaneilia Harris, president of Harris and Harris Wealth Management Group, said some people have learned this the hard way.

“I’ve had clients that come talk to me after the fact, after they made the decision,” said Harris, a member of the CNBC Financial Advisor Council.

“They talk to me and they realize, ‘I shouldn’t have done because now I have to pay the taxes.’”

Roll it over to your new employer’s 401(k)

If your new job comes with a 401(k), you can opt to roll over your previous employer’s 401(k) into the new one. By doing this, you preserve the tax-deferred status.

The first thing to do is to evaluate the new plan to make sure it has plenty of investment options and includes the ones you prefer, advises the Financial Industry Regulatory Authority, or FINRA.

Once you enroll in your new plan, make sure it will accept a transfer and see if there is a waiting period before you can move the funds.

After it is active and ready to accept a rollover, ask your former plan administrator to send a check or electronically transfer the money to the administrator of the new plan.

If you don’t roll it over, you may still want to take advantage of your new employer’s 401(k), particularly if it gives you a matching contribution.

“If you’re fortunate, you’ll get an employer where the match might be as much as a dollar for dollar,” Benna said. “If you don’t take advantage of that, you’re throwing the money away.”

Roll it into an IRA

If you opt not to transfer your money into your new employer’s 401(k), or if the job doesn’t offer one, you can move the funds into an individual retirement account. Again, you’ll maintain the tax-deferred status.

“The advantage of rolling into an IRA is you decide where the money is going to be invested,” Benna said.

“Also, it’ll be a lot easier for you to find out what fees you’re going to have to pay.”

Those fees can vary, depending on the kind of services included. However, you generally have more investment options in IRAs than in 401(k) plans.

You can also continue to contribute to the IRA. The annual contribution limit for 2019 is $6,000 or $7,000 if you are age 50 or older.

Decide if you need a financial advisor

You don’t have to use a financial advisor, but if you are uncomfortable rolling over your 401(k) on your own, then you can certainly hire someone, Benna said.

“If you use a financial advisor, you’re probably gonna pay probably some higher fees,” he said.

However, for her part, Harris believes it’s important to at least have a conversation with a professional before you make a final decision about your old 401(k), even if it is just one time billed at an hourly basis.

“You want to play out all the options and how they affect you,” she said.

For example, a doctor going from a private to a group practice would want to stick with a 401(k) because it gives them more legal protections, she said.

“Each profession has their different nuances to it,” said Harris.

Disclosure: Invest in You: Ready. Set. Grow. is a financial wellness and education initiative from CNBC and Acorns, the micro-investing app. NBCUniversal and Comcast Ventures are investors in Acorns.

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