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Despite signs of a slowing labor market, Americans — especially younger ones — are still job-hopping. According to a recent Prudential Pulse survey, roughly one-third of millennials have changed jobs since the pandemic began. Among Generation Z workers, nearly half have switched employers, and 18% have been through more than one job change during this time frame.

While changing employers is typically the most reliable way to increase your income — Pew Research found that 60% of workers who switched jobs between April 2021 and March 2022 got a raise, versus 47% of workers who stayed with the same employer — it’s important to make sure that chasing a higher paycheck doesn’t come at the cost of disrupting your retirement goals.

A new employer means a new system of retirement benefits, which means the more bullet points you add to your resume, the higher the number of employer-sponsored retirement accounts you can rack up. Just as you’d approach a new job offer with a strategy for negotiating the best salary possible, your retirement money goals also will benefit from a coordinated strategy.

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What can you do with an old 401(k)?

When you leave an employer and have a 401(k) — or another tax-preferred retirement account such as a 403(b) or 457(b) — you generally can do one of three things:

  1. Leave it where it is
  2. Roll it over into an IRA
  3. Roll it over into your new employer’s retirement plan, if your new job offers one and allows roll-ins

There are a few considerations and caveats for each option.

When leaving it alone makes sense

There’s something to be said for leaving the account where it is, says Brian Kuhn, senior vice president and financial advisor at Wealth Enhancement Group. “Leaving it where it is has the advantage of, it’s the least amount of work,” he points out.

In addition, if you’re happy with the performance of your investments or if your new employer’s plan doesn’t offer as many good options, keeping an old retirement account might make sense. Just make sure that the plan administrator won’t assess you higher fees because you’re no longer an employee. Not all do, but it’s a potential cost you don’t want to overlook.

Keep in mind, though, if your account has less than $5,000 in it, you might not have the option to keep the money within that plan: Some plans don’t let former employees keep small-dollar-balance 401(k)s on their books. Ideally, this is something you should find out early enough that you have time to set up an individual retirement account (IRA) if your new job doesn’t give you access to a qualified retirement plan.

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Good reasons to do a rollover

Leaving your old 401(k) in an old company's plan has a downside: the need to keep tabs on multiple retirement accounts in order to get a holistic look at your financial situation. If organization isn’t your strong suit, that could be a point in favor of rolling over that balance.

Whether it’s better to move the money into a new employer’s plan or into an IRA at a brokerage, credit union or other financial institution depends on a few factors.

The pros of choosing an IRA

IRAs win for the variety of investment options, says Rachelle Tubongbanua, vice president and private wealth advisor at U.S. Bank Private Wealth Management. “If [investors] were to go into a 401(k), they’re limited to the funds available within that plan.”

Within an IRA, you can invest in ETFs, individual stocks and bonds, and — if you open a self-directed IRA — alternative asset classes that aren’t typically offered in 401(k) plans, like real estate or precious metals.

ETFs can be more of a bargain than mutual funds because they tend to be passively managed — more automation on their end means lower expenses on yours. “ETFs will provide that diversification you need at a lower cost,” Tubongbanua says.

The pros of choosing a 401(k)

A 401(k) might be a better choice if your new employer offers any financial planning or advisory services. If you don’t plan to actively manage your portfolio, having professional guidance available could yield better performance over the long term. Also, if you plan to borrow against your nest egg, you’ll need that money in a 401(k) as opposed to an IRA.

If you foresee a lot of job-hopping in your career, keep in mind that rolling over a 401(k) balance into an IRA to which you contribute other funds could make it a hassle to switch back into a 401(k) because the IRS has different rules for handling money and treating investment gains from different sources.

“The main point is keeping the assets segregated,” says Chad Parks, founder and CEO of Ubiquity Retirement & Savings. “It’s almost better to open an IRA separately just to hold that money” from an old 401(k) if you anticipate wanting to roll it into another employer plan sometime in the future, he advises.

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Direct vs. indirect rollovers

If you decide to move your money, financial advisors say a direct rollover — in which the old and new plan administrator directly coordinate with one another — is the way to go. You’ll have to fill out paperwork and possibly get on the phone with one or both companies, but the funds in that account never technically pass through your hands.

The alternative is an indirect rollover: The old plan pays the 401(k) balance to you directly, at which point the clock starts ticking. You have 60 days to get those funds safely squirreled away in a new qualifying account, or the IRS will view the activity as an early withdrawal. If you’re younger than 59 ½, this puts you on the hook immediately for income taxes due on that money, as well as a 10% early withdrawal penalty.

The other pitfall is that even if you’re positive you can complete the rollover transaction in time to meet the 60-day cutoff, you’ll have to come up with a potentially significant amount of cash. Plan administrators must withhold 20% of the account balance as a contingency in case you do miss the deadline or decide to keep the money. If you complete your rollover on time, you’ll get the money back when you do your taxes the following year — but since you have to deposit the entire balance of your old 401(k) into the new account, this means you need to get that 20% from some other source to make the account whole.

“Indirect rollover is definitely something you want to try to avoid,” says Kuhn from Wealth Enhancement Group.

Never do this with an old 401(k)

Financial experts are unanimous on one point: It’s always a bad idea to cash out a retirement account. You’ll immediately owe both federal and state income tax on that money — and the balance is big enough, you could inadvertently push yourself into a higher tax bracket. In addition, you’ll incur that 10% early-withdrawal penalty if you’re younger than 59 ½.

“In a worst case scenario, you can be looking at 40% to 50% being paid to taxes,” Parks says. “It’s really not worth it, unless there’s an absolute emergency.”

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