You may know that a tax-advantaged account such as a 401(k) is a great way to invest and save up for retirement. But do you realize that when you leave a job, you shouldn’t necessarily have your retirement savings exit too?

A recent survey by retirement planning firm Financial Engines found that 42% of people who leave their jobs don’t realize they have the option to keep their retirement savings in their ex-employer’s plan. Moreover, nearly 70% of employees with 401(k) plans didn’t consult a financial adviser about retirement distribution strategies, the survey indicates. The options that they may not be aware of when leaving a job include shifting the 401(k) assets into an IRA or moving the assets to a new employer’s retirement plan. Failing to do so can be costly.

In fact, there are numerous financial traps along the way that too many people  don’t pay enough attention to when they switch jobs. And that can erode the value of their retirement savings.

The potential hazards…

Cashing Out

Too many people  believe that accepting a check for their retirement funds is comparable to winning at a Las Vegas slot machine. In fact, about one-third of people surveyed said they had cashed out and withdrawn retirement savings from their employee account and 41% said they had no intention of reinvesting their retirement savings. But the employees who cash out their savings to spend are making a bad long-term decision. 

Taking this money out of a retirement account and failing to shift it to a new retirement account within 60 days triggers tax implications and a 10% penalty if the employee hasn’t reached the age of 59½.

In addition, most people don’t consider the long-term benefits of investing their money. If you have $20,000 in a retirement plan that grows at a 6% annual rate, this multiplies to more than $120,000 over 30 years. If, instead, you cash  in your retirement plan immediately without investing the money, the amount is slashed to about $10,000 after federal, state and local income taxes and the $2,000 penalty.

Assuming an IRA Is the Best Option

Many people assume that moving retirement funds into an IRA when leaving jobs makes the most sense because then you don’t have to create track of multiple retirement accounts.

This option may work well for most people, but you need to do some research first. An ex-employer’s or new employer’s 401(k) plan may have lower fees and other benefits over an IRA. When in-plan fees are considered, keeping your retirement savings in a workplace plan, rather than an IRA, could save you an average of $4,600 on a $100,000 balance over 10 years, according to Edelman Financial Services.

If you do favor an IRA, you may want to consider a Roth IRA over a traditional IRA for at least part of your money. Even though you will owe income taxes when moving funds from a traditional IRA to a Roth IRA, many people prefer this option, as earnings on the assets and future withdrawals will be tax free.

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