Aan estimated 4.4 million Americans quit their jobs in April 2022. This unprecedented upheaval in the labor market has been dubbed the Great Quit, and for more than a year it’s still going strong. New jobs can bring better pay and better retirement benefits, but rushing to quit your old job can lead to huge financial headaches in the long run.

You especially want to be careful about how you handle your 401(k) from your old job. If you make the mistake described below, you could end up with a huge tax bill.

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What not to do with your old 401(k)

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

This could increase your taxable income by tens or even hundreds of thousands of dollars, pushing you into a higher tax bracket and paying a huge bill. Not to mention that you also withdraw your savings from the stock market, so that they can no longer grow. Oh, and then there’s the 10% early withdrawal penalty for adults under 59.5. This money has just disappeared. The government takes it from you and does not give it back to you.

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

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

The best way to transfer your money is to make a direct transfer to a new 401(k) or IRA. To do this, all you have to do is fill out a form with your former 401(k) provider indicating where you want your money sent. If you have questions about getting 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), so check the rules for your new plan before trying. If you are unable to move your money into your new 401(k), you may need to open an IRA and put your money there instead. The process is essentially the same, but you will have many more options for how to invest your money.

If you’ve already cashed in your old 401(k), you may be able to avoid the severe 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 had transferred it by direct rollover.

But if you don’t deposit the exact amount you withdrew or don’t do so within the required timeframe, the government will tax the unpaid 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 saving up front before you quit. And don’t quit your job until you find a new one. This will ensure minimal disruption to your finances, so you won’t have to dip into your retirement savings sooner.

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