The average US employee switches jobs 11 times before retiring. That means you could potentially participate in 11 different 401(k)s or other retirement savings plans during the course of your career.
If you’re starting a new job or looking to change careers, you’ll have to make a decision about your 401(k). The good news is – 401(k) plans are portable.  You could  consider moving it to your new employer’s plan if the plan accepts transfers. You could move your assets to an individual retirement account (IRA) or withdraw the money as a lump sum. Or you may be able to leave the account where it is. Before making a decision, know that each option has its own unique benefits, risks and penalties.
If you leave the money where it is or roll it over into a new plan or IRA – you won’t lose the contributions you’ve made, your employer’s made (if you’re vested) or earnings you’ve accumulated in the old 401(k). Your money will maintain its tax-deferred status until you withdraw it.
If you do instead decide to withdraw the money – beware of the penalties.
Believe it or not, many people make the mistake of asking their employer or plan administrator to cut them a check after they leave their job, without considering all the consequences. Doing so can be extremely costly.
First, your employer will withhold 20 percent of your account balance before cutting you a check, just to prepay the tax you’ll owe. Also, the IRS may consider your payout an early distribution meaning you could owe a 10 percent penalty for early withdrawal in addition to paying federal, state and local taxes. After all is said and done, you could lose more than 50 percent of your account value this way.
Lets also not forget the the opportunity cost involved. If you took $10,000 out of your 401(k) instead of rolling it over into an account earning 8 percent tax-deferred earnings, your retirement fund could end up more than $100,000 short after 30 years.
If you can, keep your money in a 401k or IRA somewhere. It will allow it to compound tax deferred.
Regardless of which route you choose, always remember to evaluate your new plan closely before deciding to move your assets over. Make sure the new plan has plenty of investment choices, includes all the options you prefer, and that the fees aren’t too high. If you’re unhappy with the options provided by your new employer’s 401(k), consider a rollover into an IRA. If you’re unsure, talk to a trusted professional that is licensed to offer suitable advice on such matters.
By law, you must have at least 30 days to decide what to do with your 401(k) when you switch jobs, so you have time to consider all your options before making a move.
Sources: US Securities and Exchange Commission. Financial Industry Regulatory Authority, Inc. Photo credit: Dave Dugdale