Joining the Great Resignation? Don’t Make This Mistake With Your Old 401(k)

About 4.4 million Americans quit their jobs in April 2022. This unprecedented shakeup to the job market has been dubbed the Great Resignation, and over a year in it's still going strong. New jobs can bring better wages and better retirement benefits, but rushing to leave your old job can lead to huge financial headaches down the line.

You especially want to be careful with how you handle your 401(k) from your old job. If you make the mistake discussed below, you could find yourself staring down an enormous tax bill.

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What not to do with your old 401(k)

It's understandable if you don't want to keep a bunch of your retirement savings in an account connected to a former employer, but cashing it out is a bad idea. About 21% of workers who have quit their jobs during the Great Resignation and had a 401(k) say they cashed theirs out, according to a Fidelity survey. They may not realize it, but the government considers these withdrawals a distribution, and they'll owe taxes on this money in the year of their withdrawal.

This could raise your taxable income by tens or even hundreds of thousands of dollars, pushing you into a higher tax bracket and landing you with a huge bill. Not to mention you're also pulling your savings out of the stock market, so it can't grow any further. Oh, and then there's the 10% early-withdrawal penalty for adults under 59 1/2. That money's just gone. The government takes it from you and doesn't give it back.

Fortunately, there are other ways to move your 401(k) money that don't bring these penalties. We'll look at two of them below.

The safe way to move your old 401(k) funds

The best way to transfer your money is through a direct rollover to a new 401(k) or IRA. To do this, all you have to do is fill out a form with your old 401(k) provider stating where you want your money sent. If you have any questions about how to get your money to the right place, you can always ask your new 401(k) or IRA provider.

Not all 401(k)s allow transfers from other 401(k)s, so check your new plan's rules before you attempt this. If you're not able to move your money into your new 401(k), you may have to open an IRA and put your money there instead. The process is essentially the same, but you'll have a lot more options as to how to invest your money.

If you've already cashed out your old 401(k), you may be able to avoid the hefty tax consequences by doing an indirect rollover. This is where you cash out your 401(k) and deposit it into a new retirement account within 60 days. If you do this, the government will treat the money the same as if you'd transferred it by direct rollover.

But if you don't deposit the exact amount you withdrew or you fail to do so within the required time frame, the government will tax the outstanding amount as if it were a distribution. Try to avoid this at all costs.

If you need a little extra cash to tide you over until you start a new job, try to save up in advance before you quit. And don't quit your job until you have a new one lined up. This will ensure minimal interruption to your finances, so you won't have to tap your retirement savings early.

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