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Managing your 401(k) when you change jobs

If you change jobs, what should you do with the 401(k) from your previous position? Learn about your options in this video.

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Video transcript

Let's say that right now you are working for Company A. So I will call this job Job A and the Company A has a 401K program. So this is Company A's 401K and you have been contributing to that 401K program. So this is your money sitting there in Company A's 401K program. Now let's say you've had a nice time at Job A. You got a lot of good experience but Company B now comes along and you're excited about the opportunity that it's offering you, so you leave Company A and you go to Company B. So I'll just call this job Job B. Job B right over here. And let's say Company B also has a 401K program. If it didn't, you should maybe question your decision. All right, so Job B also has a 401 program. And so you have a couple of questions cause you have one primary question. You moved from Job A to Job B but what do you do with your money? Does your money move from 401K A to 401K B? Does it do something else? And that's what the focus of this video is on. And you have fundamentally four options. One option is you could keep the money where it is. Even though you've left, you don't have to take your money with you. So one option is leave it in Company A's 401K program. Another option is you could roll it over into your new company's 401K program. So you could rollover it and you're not gonna pay any fees or any taxes on that. It's just transferring from one 401K to another. Your third option is you could put it in an IRA. So let me make this in a, I'll do this in this light pink color. So you could put it in an Individual Retirement Account. And then your fourth option is you could just take the money out. So you could just take the money and put it in the bank. And put it in the bank. Now let's think about each of these options. And I always encourage you, pause the video and think about it with yourself. Which one would you do? Well let's first think about this bank option because strangely enough this is what a lot of people do when they go from one job to another. But we've already talked in multiple videos about you shouldn't take money out of a retirement account unless you really need to. One, you're essentially taking money from your older self. Your younger self is kinda being a little bit selfish. So that's one reason not to do it. But also you're gonna pay a penalty. So you're going to pay a penalty for withdrawing it before 59 and a half. And of course you're also going to pay taxes on it. So the taxes are no longer going to be deferred. So once again it's your younger self being selfish relative to your older self and you're going to pay money on it. So this is not a suggested thing. The only time that you should really think about doing this is if you're in a very, very, very desperate situation. But changing jobs hopefully does not constitute a desperate situation. So once again, I can't say absolutely never do this but strongly, strongly not recommended. So now let's think about these other options where I'm doing some variation of keeping my money in a retirement account. How do I think about it? Well when comparing one 401K to another 401K they might be different. Job A's 40... I could imagine one reason to keep it in Job A's 401K, in your existing 401K, is maybe they are more flexible. Maybe they let you invest in the types of things that you invest, while Job B is a little less flexible or they don't let you invest in as many things. So that could be a reason to keep it up here. Now why would you want to put it in an IRA? Well IRAs tend to be the most flexible. You could invest in a kind of a very broad, no kind of 401K program is restricting your investments. So this is the flexible. This is the most, well I guess your putting it in the bank is the most flexible but you've paid money on it. And I've just said you're taking money from your older self. But IRA tends to be flexible. So why would you put it in Job B? Well one, Job B might have a better 401K program than Job A. So that would be an obvious thing. And then the other thing, and this is more of a psychological thing, it's kind of just simpler to keep it in one place. So one place. I know personally for me, you know you could try to optimize things. Put a little money here, put a little money there but a lot of times simplicity rules the day. You just have to just want to deal with one 401K program otherwise you're kinda having to keep track of all of these different things, you're afraid that you might forget about the money here and might not manage it properly. So this might just be the simplest thing to do. Hopefully you will contribute to your 401K program in Job B and so if just roll over that money, then all your money is going to be in one 401K program. So you might do that. If you're into IRAs you can do that. Once again, taking the money out is an option but it's not recommended. Now the last thing you might say is well okay what's the difference between maybe I want to put all my money in one place in an IRA instead of a 401K. We talk about this in other videos but the general notion is is that there's slight differences in how you administer these things and in the flexibility in, well definitely how you invest it and also in how you could take it out. IRAs, they do allow some taking out without penalty up to $10,000 if you're buying your first home or if you haven't owned a principal home in the last two years. They allow some for paying for college tuition. While a 401K, depending on how it is administered, they will allow you to take a loan out potentially from your 401K money without paying a penalty. But you have to be very careful whenever you do all of these things. Make sure you understand all the information correctly. So anyway, your choice. Congratulations on the new job but I definitely would not suggest just because you're leaving your old job that sometimes you say oh let me just take this money out because that's, once again, taking from your future self.