What Happens to a 401(k) When You Quit?

Whether you’re taking a new position with another company, retiring or being let go, if you have a 401(k) or similar retirement plan, you’re probably wondering: What happens to your 401(k) when you leave a job? Among other options, you could leave your 401(k) in your old employer’s plan or roll your 401(k) into either an individual retirement account or your new employer’s plan. The choice is really up to you, but you need to explore and weigh your options thoroughly. Even if the amount in your 401(k) is small, this isn’t a decision to be taken lightly. Read on to understand your main options, and find out what to do with your 401(k) when you quit.

Leave Your 401(k) in Your Old Plan

Leaving your 401(k) in your old employer’s plan saves you from having to make an immediate choice about what you want to do with your 401(k) when leaving a job. A temporary decision to leave your 401(k) in your old plan can turn into a permanent one, so you need to make this choice proactively. Otherwise, you might find yourself with a lot of old 401(k) accounts you’re not as invested in as you should be.

Before making this decision, there are some things to consider. For instance, if your balance is under $1,000, your employer can discontinue your plan without your permission. Additionally, if your balance is between $1,000 and $5,000, your employer is permitted to move your balance to a separate individual retirement account.

No matter what, you should contact your old employer and discuss your options. Keep in mind that if you choose to leave your 401(k) intact, you will not be able to add additional money to the plan — and your ability to take a loan from your plan will no longer exist in most cases. Also, withdrawal options might be limited, and you might have to take the entire account balance versus a partial withdrawal.

Roll Your 401(k) Into an IRA

Rolling your 401(k) balance into an IRA with an institution of your choice is a great option. IRAs are available with popular providers like Charles Schwab and Fidelity, and many mutual fund companies and brokerage firms offer IRA options as well.

There are a few 401(k) rollover rules to follow when rolling your 401(k) into an IRA. For example, make sure that the rollover is done as a trustee-to-trustee transfer. This means that you never take possession of the money and is the best way to ensure the tax-deferred nature of the 401(k) is preserved. Also, make sure you’re aware of whether your 401(k) account includes shares of company stock. In this case, you can take advantage of the net unrealized appreciation rules, which can carry some significant tax advantages.

If you’re working with a financial advisor, an IRA can be a good way to consolidate your retirement plan investments and have them invested in line with your financial plan. One caution here is that there are some brokers and registered representatives who target employees of large organizations trolling for 401(k) rollover opportunities. They might try to roll the money into high-fee investments that might not be in your best interest.

Overall, an IRA will offer a wider array of investment options, including mutual funds, exchange-traded funds, closed-end funds, individual stocks and more. Some firms will also allow you to open a self-directed IRA. This type of IRA allows you to invest in nontraditional investments, such as real estate, gold and cryptocurrencies.

But always use caution before going this route, and be sure you understand the fees and risks.

Roll Your 401(k) Into Your New Employer’s Plan

If you’re switching jobs, rolling your 401(k) into your new plan might be the best option for you. You’ll need to check with your new employer to see if its 401(k) plan accepts rollovers, however. If the new plan offers superior investment options, this is definitely a great choice, but there are some other factors to consider.

For example, you’ll want to be sure the new 401(k) plan allows you to consolidate the money from your old plan and your new one. This leaves you with fewer accounts to worry about, which allows you to focus on investing in one plan. You’ll also want to know if there are any penalties if you leave before you’re 100% vested in the company match. If there are penalties, you might receive a larger share of the money with a larger account balance.

Lastly, under federal law, rolling the old money into a new 401(k) plan affords greater creditor protection than rolling it into an IRA. This could be helpful in certain situations and should be considered as you’re looking into the new plan.

Take a Distribution or Cash Out Your 401(k)

Whether you take a partial distribution or cash out your entire 401(k), this is the worst option when deciding what to do with your 401(k) when leaving a job. Taking a distribution or cashing out your 401(k) subjects your money to taxes at high rates — and if you’re under 59 ½ years old, you’ll incur a 10% penalty on top of the taxes due. Additionally, this option takes money out of your retirement savings, which will cause you to have less money when you finally do retire.

Some exceptions to the 10% penalty for those under 59 ½ include instances of death and disability, an IRS levy on your account or a qualified domestic relations order in the instance of divorce. Additionally, there’s an exception if you leave the company at or after age 55. This exception is known as Internal Revenue Code section 72(t), and if it applies to you, it’s best to find a financial advisor who understands the complex rules of this section before making any decisions on your own. Otherwise, taking a distribution is probably the last option you’d want to consider.

Cynthia Measom contributed to the reporting for this article.

This article originally appeared on GOBankingRates.com: What Happens to a 401(k) When You Quit?