Leaving a job? Take your 401(k) with you

NEW YORK – Don’t forget to take your 401(k) on the way out.

As the job market picks up, one of the most important loose ends to tend to when changing jobs is your workplace retirement account. The actions you take – or fail to take – can result in tens of thousands of dollars in lost savings over a lifetime.

It’s a crossroads that will impact many more workers as they break free from toiling away unhappily for lack of a better option.

A survey by the Associated Press found that economists expect roughly 1.9 million more jobs will be added to the economy this year. That’s up from the 1.6 million last year and 940,000 in 2010. And last month, the unemployment rate fell to 8.5 percent, the lowest level in three years.

Regardless of why you leave, you’ll want to take action when you receive a package from the plan administrator asking what to do with the money in your account.

Here’s an overview of your options:

The cash out

If you don’t have any immediate job prospects, the temptation to cash out a 401(k) account can be powerful.

This is especially true if you’re young; it’s easy to assume you’ll just catch up on savings once you’re on a more solid career path. But an immediate payoff comes at a price.

By law, your employer will take 20 percent in withholding taxes off the top. And if you’re in a high tax bracket, you’ll need to pay any income tax you owe beyond the 20 percent when it comes time to file your return. The money will also be subject to a 10 percent early withdrawal penalty if you’re younger than 59 ½.

In other words, taxes and penalties can chew up a good chunk of the money you’ve socked away. So think through whether the costs are worthwhile and if you have any better alternatives.

If you opt to withdraw the money but then regret the decision, you have 60 days to roll the balance into another retirement account to avoid paying taxes and penalties. But there’s an important caveat to keep in mind: You’ll need to come up with the 20 percent withheld in taxes by your employer to avoid forking over any fees on that amount.

For example, let’s say you cash out a 401(k) account worth $10,000. That means your employer will withhold $2,000, or 20 percent, and send you a check for $8,000.

If you then decide to roll the money into a retirement account, you’d have to come up with that missing $2,000 to avoid paying taxes and early withdrawal penalties.

The rollover

If you have another job lined up, it may seem like a no-brainer to have your old 401(k) money rolled over directly into your new plan. But you’ll first want to examine the features of the new program.

“It shouldn’t be an automatic decision,” said Gil Charney, an analyst with The Tax Institute at H&R Block. You may find, for instance, that the investment options offered by your new employer aren’t as numerous or of the same quality as your previous plan. Or if you’re going to work for a small company, you may be reluctant to roll over a sizable 401(k) account until you’re more certain of your career path.

“You might not want to go that route until you know how the chips are going to fall,” Charney said.

If your next gig doesn’t offer a 401(k) – or you just want a little more flexibility with your investments – you can also roll the money into an individual retirement account, or IRA.

The upside of an IRA is that it gives investors more options than a 401(k). For instance, an IRA can be spread over a mix of CDs, individual stocks and funds. You also have the freedom to transfer IRA accounts from one brokerage to another, although you might incur transfer fees at some institutions.

If you’re torn between rolling the money into an IRA or new 401(k), there are some other key differences worth noting. The annual contribution limit for an IRA is $5,000, or $6,000 if you’re 50 or older. That’s compared to $17,000 for a 401(k) account; those 50 and over can kick in an extra $5,500 to catch up on retirement savings.

Also keep in mind that many companies often match 401(k) contributions to a point.

The status quo

In the chaos of switching jobs, you may not feel ready to make a decision about your 401(k). The good news is that you don’t have to make a decision right away.

The account will remain intact as long as you have at least $5,000 saved up. You won’t be able to make additional contributions, but you can still monitor the account and adjust the plan allocations. This might be your plan of action if you expect to have another job with a 401(k) in the near future and don’t want to put the money into an IRA.

If there’s between $1,000 and $5,000 in the account, the company can opt to roll the money into an IRA.

If you have less than $1,000, however, the company can cash out the account and cut you a check. You can request that the account be maintained, but the company has the right to make a final decision, notes Linda Wolohan, a spokeswoman for the mutual fund manager Vanguard.

Even if the company denies your request to maintain the account, remember that you still have 60 days to roll the money into an IRA or 401(k) account to avoid the penalty and taxes.