Suze Orman: Do These 3 Things With Your 401(k) If You Quit Your Job
Written by
Ashleigh Ray, AI Editor
Edited by
Ashleigh Ray
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Leaving a job is a big decision that involves more than just returning your ID badge, grabbing your personal items and exchanging contact information with coworkers. It also involves sorting out your 401(k).
Finance guru Suze Orman offers some invaluable advice on how to handle your retirement savings when you make a job change. Here’s what she says you need to do.
Don’t Cash Out
While it might be tempting, Orman strongly advises against cashing out your 401(k).
She explained, “When you leave a job, you are allowed to withdraw the money in your 401k. For younger adults, this can be tempting. You may not yet have a lot of money saved, so you figure it’s okay to use it today, rather than keep it growing.”
However, this is a costly mistake. If you’re 27 with $15,000 in your 401(k) and you decide to cash out, you’re not just losing money to a 10% early withdrawal penalty. There’s also the matter of taxes.
Orman warned, “If the money is in a traditional 401(k), you will also owe income tax on every dollar withdrawn. If your money is in a Roth 401(k), you will owe income tax on the earnings, but not what you contributed.”
The financial impact can be significant. You might end up with only about $12,000 of your $15,000. Orman then contrasts this with the potential future value: “Assuming a 6% annualized return, you would have nearly $155,000 at age 67.”
That’s a compelling reason to let your savings grow.
Decide Where To Keep Your 401(k)
If your 401(k) balance is at least $5,000, you usually can leave the money in the plan even after you leave the company. However, Orman urges you to consider whether this is the best choice financially.
She suggests checking the expense ratios of the mutual funds within your plan, explaining, “This is the annual fee that is deducted from your account to pay the fund operator.”
Orman says you can find the expense ratios easily online through your account. You should compare these fees and consider a move if they’re over 0.25%.
When the fees are too high, it may be time to think about rolling your money over into an Individual Retirement Account (IRA) where you can access lower-cost index funds and ETFs, potentially saving you a significant amount over time.
Open an IRA for Better Control and Lower Fees
Finally, if you don’t already have an IRA, Orman recommends setting one up at a discount brokerage (like Fidelity, Schwab or Vanguard).
These platforms can facilitate a direct rollover of your 401(k) funds into an IRA, which is a tax-free process. This not only potentially lowers your investment costs but also gives you more control over your investment choices.
Orman emphasized, “The less you pay in expenses, the more your money grows.” Moving your 401(k) to an IRA could mean tens of thousands more dollars for your retirement.
Leaving a job comes with its own set of challenges and tasks, and managing your 401(k) should be at the top of your list. By following Suze Orman’s advice, you can ensure that your retirement savings continue to grow and work for you long after you’ve moved on from your current employer.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
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