The 401(k) decision new retirees regret most in their first 90 days

When you first retire, you have several options when it comes to your retirement plan. Many people aren't sure what to do with their 401(k), and choosing the wrong thing can have detrimental effects on their taxes and their ability to maintain their lifestyle and retirement.

Here are the four options people typically choose when leaving a job, along with what they need to know about each one to make the best decision for their financial future. Each option has some advantages and disadvantages.

You can leave your 401(k) with your old employer

The first option people have when it comes to their 401(k) is to leave their 401(k) with their old employer under their old plan. There are several reasons people choose to do this, but many do it by default simply because this is the easiest choice.

Leaving your 401(k) where it is can minimize administrative paperwork. However, the downside to doing this is that you may be limited in your investment choices, and some plans also charge fees. Speaking with your employer before you retire and understanding your options and costs when leaving a plan with them can help you make your decision.

Roll your account into a new plan

Another option is to roll your 401(k) account into a new plan. Those who are not retiring can roll over their 401(k) into their new employer's plan. 

If you do this and you elect to get a check via an indirect rollover, just be sure to put your money in your new employer's plan by the 60-day deadline, or else the IRS will treat it as a full taxable withdrawal.

Don't forget to invest your cash when you roll over your account

For those who are recently retired, rolling your 401(k) into an IRA is another common option. The benefit of rolling your 401(k) into an IRA is that you may have more investment options and greater control over your withdrawals. If you have several retirement accounts from different employers, this is also an easy way to consolidate all of them into one account.

It's important to note that once you roll your account into an IRA, you are responsible for choosing your investments. Don't make the mistake of leaving your investments as cash. Once you roll over your money, there's typically one more step to take, which is purchasing assets. If you're not sure what to invest in, working with a financial advisor can help.

An option with consequences: cashing out your 401(k)

Another option people choose, but one that comes with consequences, is cashing out your 401(k). Some people do this because they believe it's simple. However, when you cash out your 401(k), that counts towards your taxable income for the year.

If you cash out a large amount, it could push you into a higher tax bracket, leading to significant surprises come tax time. Additionally, if you cash out your 401(k), your money is no longer invested in the market. Most people withdraw from their 401(k) gradually over a period of decades during retirement. This allows people to have money to live on in the present day, while the rest of the money they leave in their 401(k)s can continue to compound and grow.

Compare the fees before moving your money

If you decide to roll over your 401(k), take the time to compare brokerage providers and their fees before moving your money. 

Some companies charge monthly fees for managing your IRA, while others don't charge a fee at all. Fees can cut into your overall investment returns, so it pays to check before you choose a company.

Take your time when deciding your next steps

Ultimately, it's important to take your time when you're deciding how to handle your 401(k) when you leave a job. Making a decision can feel intimidating because there are repercussions if you don't fully understand your options. So, before rushing to make a decision, make sure to fully review your options.

It's up to you to determine whether you can leave your 401(k) with your old employer or roll it over into an IRA. Taking a few weeks to make the right decision for you is better than making a mistake because you rushed the process.

When in doubt, ask for help from a professional

If you're not sure what to do with your 401(k) after reviewing your options, ask for help from a qualified financial professional. 

Working with a financial planner can give you peace of mind and help you feel supported when making decisions about your retirement finances.

Bottom line

If you're on track for retirement soon or just recently retired, it's time to decide what to do with your 401(k) account. You have several different options, and it's important to take your time deciding which is best for you. As mentioned, if you're not sure what to do, a financial advisor can always help.