Congratulations on your new job! The higher salary, more engaging work, and shorter commute are all reasons to celebrate. However, there’s an important question: What should you do with the funds in your old company’s 401(k), 403(b), or 457 plans?

Many workers, unfortunately, choose the worst option—they cash out their retirement savings. While this might seem appealing, it often comes with significant financial consequences.

The Cost of Cashing Out

Cashing out your retirement savings may feel rewarding in the short term—perhaps you’re planning to pay down credit card debt or take a luxurious vacation. However, this decision has serious financial downsides:

• Federal Tax Withholding: Your former employer will withhold 20% of your savings for federal taxes. For example, if you have $50,000 saved, you’ll only receive $40,000 after the tax withholding.
• Early Withdrawal Penalty: If you’re under 59½, you’ll incur a 10% penalty on the amount you withdraw.
• Starting Over: Cashing out means beginning your retirement savings from scratch at your new job, potentially significantly setting your long-term financial goals.

Better Options for Your Retirement Savings

Instead of cashing out, consider these more financially sound strategies:

1. Roll Over Into a Traditional IRA

A direct rollover into a Traditional IRA is one of the most popular options for transferring retirement savings. Here’s why it’s a smart move:

• No penalties: You won’t pay the 10% early withdrawal penalty since the funds remain in a retirement account.
• Tax advantages: No 20% federal tax withholding exists because you’re not cashing out the funds.
• Investment flexibility: IRAs often offer a broader range of investment options, such as stocks, bonds, mutual funds, and ETFs, allowing you to tailor your investments to your goals and risk tolerance.

2. Transfer Funds to Your New Employer’s Plan

Another option is to transfer the funds from your old employer’s retirement plan into your new company’s plan. This strategy consolidates your retirement savings into one account, making it easier to manage.

Advantages:

• No penalties or tax withholding.
• Keep your retirement savings in one place for easier tracking and management.

Check With Your New Employer:

Not all companies allow rollovers into their retirement plans. Contact your new employer’s human resources or benefits department to confirm this option.

3. Leave the Money in Your Old Plan

You may also leave your savings in your old employer’s retirement plan. Most companies allow this as long as you have at least $5,000 in the account.

Advantages:

• Requires no immediate action or decisions.
• Keeps your savings invested, potentially earning returns over time.

Drawbacks:

• You can’t add new contributions.
• You may lose touch with the plan, making it harder to track performance or respond to changes in investment management.

Making the Right Choice

Your decision depends on your financial goals, new employer benefits, and how comfortable you are managing investments. Here are some tips to guide you:

• Avoid cashing out: The penalties and tax implications outweigh the short-term satisfaction of accessing the funds.
• Do your research: Speak with your new employer to understand their retirement plan options and whether they allow rollovers.
• Consult a financial advisor: If you’re unsure which option is best, a financial advisor can help you make a well-informed decision.

Final Thoughts

When starting a new job, deciding what to do with your old retirement savings is crucial in securing your financial future. Whether you roll over into an IRA, transfer to your new employer’s plan, or leave the funds in your old plan, make sure to keep your long-term retirement goals in mind. Avoid the temptation to cash out—your future self will thank you.