Ask a Fool: What Should I Do With My Old 401(k)?

By Matthew Frankel Markets Fool.com

Q: I recently switched jobs. What's the best option with my old employer's 401(k): roll it over, leave it alone, or cash it out? -- Heather S.

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When it comes to your old 401(k), there are four options that may be available to you: You can leave your account alone, roll it into an IRA, roll it into your new employer's plan, or cash it out. The first three can all be smart choices.

My top recommendation is to roll the account into an IRA. This is usually a simple process, and its biggest benefit is the it offers you more investment choices. Unlike a 401(k) plan, which probably has a selection of a few dozen investment funds at most, with a rollover IRA you can invest in virtually any stock, bond, or mutual fund you want. If you'd like to invest some of your retirement savings in, say, Apple stock, you are free to do so.

On the other hand, there's absolutely nothing wrong with keeping your 401(k) on autopilot if you don't have the time or desire to research and select your own investments. In fact, if that's the case, I encourage you to either leave your 401(k) where it is, or roll it into your new employer's retirement plan if that's an option. Generally, the smartest move is to evaluate the fees charged by the investment funds that you'd pick in each plan, and go with the plan that offers the lower-cost options.

Finally, under (almost) no circumstances is cashing out your 401(k) a smart choice. Not only will the money be considered taxable income, but you'll get hit with an additional 10% penalty from the IRS unless you qualify for an exception. Worse yet, you'll be robbing your retirement. A $10,000 401(k) balance can easily become less than $6,000 after taxes and penalties, whereas if left alone, it could grow to more than $130,000 after 30 years at the market's historical rate of return. Seems like a no-brainer.

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Matthew Frankel owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.