Here's The Smartest Way To Handle Your 401(k) When You Leave A Job

But you'd never stay with a company just because of the 401(k), right? If you get a better offer somewhere else, you'll probably want to take it.

So when you do finally leave, what happens to your 401(k)? 

The money is yours, of course. It's your retirement account. You can decide what to do with your 401(k) when you change jobs, but you need to know what your options are — and the consequences.

If you make the wrong choice, it could cost you thousands of dollars.

What Are Your Options?

For the most part, when you leave your job, there are three options for your 401(k):

1. Leave it alone
2. Withdraw the money
3. Roll it over

Not every company lets you keep your 401(k) where it's at. Some companies, though, will let you leave your 401(k). If you like the investment choices with your current plan, and if you are satisfied with the fees, it can make sense to keep your money where it's at.

You won't be able to make new contributions, though, and if your employer has been making matching contributions, that will stop, too. You will have to open another retirement account and contribute to it if you want to continue building your nest egg.

Option No. 2: Withdraw the money

This is the absolute worst thing you can do. If you are under the age of 59 1/2, you will be assessed a 10% penalty on the amount. On top of that, the amount you withdraw from your traditional 401(k)will be considered income, and you will pay taxes. If you have a large nest egg, withdrawing the money all at once can cost thousands of dollars in penalties and taxes.

Instead of withdrawing the money, take the time to set up a proper transfer. 

Option No. 3: Rollover

Your best option is usually to roll the money in your 401(k) over into another retirement account. If you have a new employer, it's fairly simple to complete the process. Ask your new human resources representative to help you. Often, all you need to do is fill out a form. You'll need information on your old account, though, so make sure you have that handy.

It's also possible to roll your 401(k) into an IRA. This allows you greater control over the investments you include in your account. If you aren't happy with the investing choices presented by your new employer's plan — or even if you just want more flexibility and control — rolling your 401(k) into an IRA can make sense.

Later, if you don't mind paying the required taxes, you can convert your traditional IRA to a Roth IRA for tax-free earnings going forward.

What About Vesting?

One of the considerations you should make before you accept a new job and move your 401(k) is whether you are vested. Any money that you contribute is always 100% vested — meaning it's yours to take with you.

The money your employer has contributed on your behalf through a matching program, though, is not always 100% vested. Many plans require that you work for a company for a certain amount of time before the match portion is completely vested. It's common for you to need to work at least five years to be fully vested.

Consider the following:

Your company plan vests 20% of the employer match each year, until you reach 100% in five years. If you change jobs after three years, you only take 60% (3 years x 20% vesting each year) of the employer match with you. You contribute $4,000 a year to your 401(k), and your employer matches 50% of your contributions, for a total of $6,000 ($2,000 x 3 years). However, you're only 60% vested. So, when you leave, you take 60% of that $6,000 with you, or $3,600.

If you are close to reaching another vesting period, it might be worth it to stick it out a little bit longer if your company has a generous matching program. You could walk away with thousands more.

Repaying Your Retirement Account Loans

Finally, realize that when you leave your job, any loans that you have outstanding against your 401(k) need to be repaid. You usually have 60 days to repay these loans once you change jobs. Even if you are only two years into a five-year 401(k) loan, you will likely be required to repay what you owe. If you don't repay the amount you owe, it will be considered an early withdrawal, triggering penalties and taxes.

The Investing Answer: Before you change jobs, double-check your 401(k) situation. Consider vesting and 401(k) loans against your account. Also, consider your options. In most cases, the best thing to do is to roll your 401(k) into your new employer's plan or into an IRA.