What happens to your 401(k) when you switch jobs?

A job change can bring about a lot of change in your personal and financial life. During this time, it's important not to forget about your 401(k) from your past employer.

Employers offer 401(k)s to help employees save for retirement. So, how can you best manage your 401(k) to help you achieve your retirement goals? You essentially have four options on what to do with your 401(k).

1. You can cash out your 401(k)

It’s your money, but if you take it out before you reach 59½, you will owe federal income taxes, plus any applicable state and local taxes.

• Also, you will likely be charged a 10% penalty for early withdrawal. Perhaps even more important, if you liquidate your 401(k) when you change jobs, you’ll be reducing the amount you’ll have left for retirement.

2. You can leave your 401(k) with your old employer

If your former employer permits it, you can leave your 401(k) intact, even after you move to a different job. This might be appealing to you if you like the investment choices in your account, but you won’t be able to make any new contributions. Plus, you won’t face any immediate tax consequences.

3. You can move the money to your new employer’s 401(k)

You can consolidate your old 401(k) with one offered by your new employer, if allowed. You won’t take a tax hit, and you might like your new plan’s investment options. And you may find it easier to manage your funds if they’re all held in one place.

4. You can roll your 401(k) into an IRA

You don’t need permission from any employer – old or new – to move your old 401(k) to an IRA . Your money will continue to grow on a tax-deferred basis, and an IRA offers you a virtually unlimited array of investment options – stocks, bonds, mutual funds and so on. You can make either a direct or indirect rollover.

• With a direct rollover, the administrator of your old 401(k) sends your money directly to the financial provider that holds your rollover IRA. No tax is withheld because you never actually take possession of the money. 
• With an indirect rollover, you’re technically withdrawing the money and moving it to the IRA provider yourself. (You’ve got 60 days to make this transfer.) You will face a withholding of 20% of your account’s assets, but you may be able to recover most of this amount when you file your tax return. Still, for the sake of ease of movement and avoiding all tax issues, a direct rollover may be more advantageous.

Which of these options is right for you? There’s no one "right" answer for everyone. You will have to consider several factors, and you’ll certainly want to consult your tax professional and financial advisor before making any decision. Should you decide to work with an Edward Jones financial advisor, they will help simplify the process of rolling over your 401(k) into an IRA account that is appropriate for your situation.