What you can do with a 401(k) from a former employer

Leaving a job is a major transition filled with mixed emotions. Amidst the excitement and nerves, don't overlook the retirement account you’re leaving behind. Since your 401(k), 403(b), or 457(b) represent a portion of your future savings, choosing what to do with it is an important decision.

To help you find the best fit for your financial goals, here are four common paths to consider, along with their advantages and drawbacks.

Choice 1.)  Leave your 401(k) with your former employer

You may choose to simply leave your funds in your former employer’s plan. While this keeps your current setup intact, be aware that many companies will automatically close your account and send you a check if your balance falls below a specific threshold.

There are valid reasons to stay put, such as access to exclusive, low-cost investment funds or specialized federal creditor protections.

However, there are downsides worth noting.

• Organization: It’s easy to lose track of "orphan" accounts, leading to neglected investments.

• Contributions: You generally cannot make new contributions.

• Withdrawal Options: Withdrawal rules are often restrictive, potentially forcing you to take your entire balance at once rather than just what you need.

Choice 2.)  Roll over your 401(k) into your new employer’s plan

Before deciding to move your funds, confirm that your new employer’s plan accepts rollovers. If they do, transferring your balance allows your savings to keep growing tax-advantaged while simplifying your finances by keeping everything in one place. You might also gain access to institutional-grade, low-cost investment options and benefit from strong federal protection against creditors. However, you’ll need to carefully review the new plan’s specific rules and evaluate whether its investment menu meets your needs.

Choice 3.)  Roll over your money into an IRA

A rollover IRA is a personal retirement account that lets you transfer funds directly from a former employer's plan. Your pre-tax savings will continue to grow tax-deferred, and you often gain access to a much wider variety of investment choices than a standard workplace plan offers.

However, there are trade-offs to consider:

• Costs: Some IRA investments may actually be more expensive than the institutional-grade options in a 401(k).

• Withdrawal Rules: If you were born in or prior to 1960, once you hit age 73, you must start taking Required Minimum Distributions (RMDs), even if you are still employed. For those born in 1960 or later, RMDs will start at age 75.

• Legal Protections: While 401(k)s have robust federal protection against creditors, IRA protections vary by state and are generally less comprehensive under federal law.

Choice 4.)  Cash out your account

The final option is to simply withdraw the cash, but this is usually the costliest choice. If you are under age 59½, you will likely face a 10% early withdrawal penalty on top of ordinary income taxes. Furthermore, your employer may withhold 20% of the balance upfront for the IRS. Beyond these immediate losses, you also sacrifice the long-term power of tax-deferred growth, which can significantly impact your future savings.

If you do decide to move your money, how you do it matters. Consider using a direct rollover, where one financial institution sends a check directly to the other financial institution. This keeps the money within a tax-advantaged "bubble" and avoids the 20% withholding.

John P. Freund is registered with and securities are offered through Kovack Securities, Inc. Member FINRA/SIPC. 6451 N. Federal Highway, Suite 1201, Ft. Lauderdale, FL 33308 (954) 782-4771 Investment Advisory services are offered through Kovack Advisors, Inc. Naples Financial Solutions, LLC is not affiliated with Kovack Securities, Inc. or Kovack Advisors, Inc.

Naples Financial Solutions does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Naples Financial Solutions cannot guarantee that the information herein is accurate, complete, or timely. Naples Financial Solutions makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

Be sure to consider all your available options and the applicable fees and features of each before moving your retirement assets.