One of the top questions asked of financial planners has got to be "what should I do with my old 401(k)?" There are four possible options (only three of which you should seriously consider....)
The first option, and the path of least resistance, is to leave the account where it is. Many people do this because they do not know how to do a rollover or they are afraid they will make a mistake when doing the rollover. This is the "easy way out" because you know the plan and are probably at least somewhat familiar with the investment options. As long as you meet the plan's minimum balance requirement, your money can stay just where it is. The problem with this option is that you can accumulate multiple 401(k)s over your working career and it can be a pain to keep track of all the accounts in different places.
The second option is to roll the old 401(k) into an IRA. The most popular reason for selecting this option is the broader array of investment options available in IRAs. One problem with rolling over to an IRA is that you cannot borrow from an IRA like you can borrow from a 401(k). However, you can take an early withdrawal under certain circumstances -- for example to pay for college expenses for the taxpayer, a spouse, or a child, or to purchase a first home, or to cover unreimbursed medical expenses that exceed 7.5 percent of adjusted gross income.
A third option is to move the old 401(k) into a new employer's plan. As long as the investment choices are decent, this option is popular because you can keep your money all in one place.
The final option is a cash out. Most all advisors will tell you to consider this as a last resort. If you are under age 59 1/2 and you select this option, your withdrawal is subject to taxes and a 10 percent early withdrawal penalty (and you miss years, and possibly decades, of tax deferred growth).
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