4 Things To Do With Your Old 401(k)s

You have the option of leaving it with your former employer, rolling it into a new employer’s plan (if they offer one), consolidating it into an individual retirement account (IRA), or cashing out.

According to the Bureau of Labor Statistics, the average American changes jobs every 4.2 years. As you move on to new opportunities, it’s important to not forget about your old 401(k) or 403(b). These accounts are likely a big part of your retirement savings! So, it’s important to know your options when it comes to what you can do with these accounts.

To choose the best option for you, consider such factors as fees, investment options, and your overall retirement goals. No matter what you decide to do with your old 401(k) or 403(b), make sure that you take the necessary steps to keep track of it so that it doesn’t get forgotten.

Our client, Betsy, came to us when she wasn’t sure what to do with old company stocks.

1. Leave Your 401(k) with Your Former Employer

Most employers allow you to do this, and this option is usually the simplest. If your former employer’s plan has low fees and quality investment options then it can be a great choice.

However, leaving money in your old account also has some drawbacks. You won’t be able to add any more money into it, or, in most cases, take out a 401(k) loan. This can be an issue if you’re trying to buy a house soon or make another big purchase. You may have to rely on a different type of loan.

2. Roll Over Your 401(k) into Your New Employer’s Plan

If your new employer has a 401(k) or another retirement plan, you can generally roll over your old account into it. This is usually the best option if your new employer’s plan offers more investment options and lower fees than your old one did. Many people choose this option so they don’t have multiple confusing accounts open.

3. Consolidate into an IRA

If your new employer does not offer a retirement plan, or the options are limited, you can always open an individual retirement account (IRA). An IRA gives you more control over how you manage your money and investments with fewer restrictions than a 401(k). You may be able to take out loans from an IRA if needed, but usually at a tax penalty.

Make sure to work with a financial institution with opening a rollover IRA so you don’t incur tax penalties. You’ll also want to research their fees and expenses.

There are two different types of IRAs, a traditional and a Roth. In a traditional IRA, your contributions are taxed when you take money out during retirement. With a Roth IRA, you pay taxes on your contributions now to avoid being taxed in retirement.

4. Cash Out Your 401(k)

Cashing out your 401(k) may be one of the easiest options, but it’s also often the least beneficial. When you cash out a retirement account, you’re typically hit with income taxes and an early withdrawal penalty of up to 10%. That’s a big chunk of money that could be better used elsewhere!

Before making any decisions, it’s important to consider the potential fees, taxes, and investment options associated with each option. Consulting with a financial advisor can help you make an informed decision. No matter what you choose, make sure to stay on top of your retirement savings and keep track of your old 401(k) so that it doesn’t get forgotten.