Quitting your job? Here's what to do with your 401(k)

The Great Resignation has been upon us for quite some time, and these days, Americans are leaving their jobs in droves. In November, a record 4.5 million Americans tendered their resignations. And given that the labor market is loaded with jobs, a lot of people aren't hesitating to seek out better opportunities.

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While moving on to a new job could be a great career move for you, it does beg the question of what to do with your 401(k) plan. While you'll generally have the option to leave that money alone, you may want to consider one of these choices instead.

1. Roll the money into your new 401(k)

If you've been offered a new job and it comes with a 401(k), you may be able to just move your money out of your old retirement plan and into a new one. The benefit of going this route, assuming you plan to participate in your new employer's 401(k), is that you'll have all of your retirement funds in a single account. That should, in turn, make your money easier to manage and make your savings progress easier to track.

That said, you'll want to do what's known as a direct rollover into your new 401(k). That way, the money will move from your old plan right into your new one, as opposed to you getting a check and having to make that transfer.

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If you don't do a direct rollover, but instead get a check for your old 401(k) balance, it'll be on your shoulders to transfer it into your new plan in a timely fashion. Otherwise, you may face tax-related consequences. Plus, you may not get your entire 401(k) balance, as your employer may be required to withhold some of it for tax purposes, even if your intent is to transfer your entire balance over to another 401(k). That's a hassle you're better off avoiding.

2. Roll the money into an IRA

It may be the case that you're leaving your job without a new one lined up or that you're taking a job that doesn't offer a 401(k) as part of its workplace benefits. In that situation, you can still open an IRA and have your old 401(k) balance rolled into that account. As is the case with a 401(k), you'll really want to do a direct rollover into an IRA to avoid the issues above.

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3. Cash out

If you're old enough to access your 401(k) funds without penalty, you may decide to just cash out your old plan upon leaving your job. Once you turn 59 1/2, any money in a tax-advantaged retirement plan is yours to access penalty-free. And in some cases, if you're 55 or older, you can tap your 401(k) from your most recent job without penalty.

But before you cash out your old 401(k), think about whether you really need that money right away. If you don't, leaving it in a tax-advantaged retirement plan will mean getting to enjoy more years of tax-deferred or tax-free growth, depending on whether you have a traditional 401(k) or a Roth. Furthermore, if you have a traditional 401(k) with a large balance and you cash it out, you'll be hit with a tax bill on that sum -- and that bill could be massive.

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No matter your reason for leaving your job, it's important to consider what you'll do with your 401(k) carefully. If you're years away from retirement, rolling that money directly into a new IRA or 401(k) is generally your best option. But either way, it's a good idea to have a game plan before your resignation becomes official.