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Changing Jobs: Should You Roll Over Your 401(k)?

Changing jobs? Here are five ways to handle the money in your employer-sponsored 401(k) plan:

1. Leave it in your former employer’s plan.

The pros: If your former employer allows it, your money can usually stay put. It will continue to grow tax-deferred, you’ll pay no taxes until you start making withdrawals, and you’ll retain the right to roll over or withdraw the funds at any point in the future.

The cons: You’ll no longer be able to contribute to the plan, and the plan provider may charge additional fees owing to your status as a former employee. Managing multiple tax-deferred accounts can also prove complicated. The IRS mandates required minimum distributions (RMDs) annually from all such accounts beginning at age 70½ (assuming you’re no longer working for the employer sponsoring the account). Fail to calculate the correct amount across multiple accounts and the IRS will slap you with a 50% penalty on the required unwithdrawn amount.

2. Roll it into a new 401(k) plan.

The pros: Assuming you like the new plan’s costs, features and investment choices, this can a good option. Funds will continue to grow tax-deferred, and RMDs may be delayed beyond age 70½ if you continue to work at the company sponsoring the plan.

The cons: You’ll need to liquidate your current 401(k) investments and reinvest them in your new 401(k) plan’s investment offerings. The money will be subject to your new plan’s withdrawal rules, so you may not be able to withdraw it until you leave your new employer.

3. Roll it into a traditional individual retirement account (IRA).

The pros: Because IRAs are individually owned, not employer-sponsored, you won’t have to worry about making changes to your account should you change jobs again in the future. IRA providers may also offer a wider array of investment options and services than either your old or new employer-sponsored plan.

The cons: Once rolled over, the funds may be ineligible to be rolled into a 401(k) plan in the future, and RMDs apply at age 70½, no matter your employment status. Also, you’ll need to specify how the funds in your traditional IRA are to be invested. Until you do so, the money will remain in cash or a cash equivalent such as a money market account, missing out on any potential market gains.

4. Convert into a Roth IRA.

The pros: Withdrawals are entirely tax-free in retirement, provided you’re over age 59½ and have held the account for five years or more. Roth IRAs are also exempt from RMDs.

The cons: Because Roth IRAs are funded with after-tax dollars, you’ll have to pay taxes on your existing 401(k) funds at the time of the conversion. A Roth IRA must be open for five years in order to withdraw earnings tax-free, and you’ll be subject to a 10% penalty if you withdraw any money before you’re 59½ without an exemption.

5. Cash out.

The pros: Liquidity—though it will come at a steep cost (unless you leave your job on or after the year you turn 55, in which case you can withdraw money directly from your 401(k) without early withdrawal penalties).

The cons: Withdrawals are subject to mandatory 20% federal withholding and, in some cases, mandatory state withholding. You could end up owing more than what is withheld depending on your federal and state income tax rates. That’s because when you fail to move the money into a qualified retirement plan within 60 days, it is taxed as ordinary income—plus a 10% penalty if you’re under age 59½. You may also negatively impact your retirement goals.

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Important Disclosures

A rollover of retirement plan assets to an IRA is not your only option. Carefully consider all of your available options which may include but not be limited to keeping your assets in your former employer’s plan; rolling over assets to a new employer’s plan; or taking a cash distribution (taxes and possible withdrawal penalties may apply). Prior to a decision, be sure to understand the benefits and limitations of your available options and consider factors such as differences in investment related expenses, plan or account fees, available investment options, distribution options, legal and creditor protections, the availability of loan provisions, tax treatment, and other concerns specific to your individual circumstances.

Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs. 

Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co. Inc. (“Schwab”), a dually registered investment advisor and broker dealer.

Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. ("CSIA"). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

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