When you transition into a new role or position, there are a lot of questions that may arise. Whether you are venturing into a new career path or your company was acquired by a larger firm, many employees are filled with excitement which often leads them to forget about their 401(k)s. But, forgetting about your 401(k) could end up costing you. Leaving money behind or even forgetting about it can substantially harm your future financial well-being.
So, what should you do with your old 401(k)? Essentially, you have four choices including:
- Leave it with your previous employer.
- Move it to your new employer’s plan.
- Roll it over into an IRA account.
- Cash it out.
Before you make any decisions, here’s what you need to know about each of your options for handling your old 401(k).
Leave your old 401(k) at your previous employer
If you like the investments in your 401(k), you may want to simply leave it with your old employer. In the short-term, this may be the best and easiest solution. Since this option doesn’t require any immediate action, you can give yourself some time to explore your other options.
You will still want to consider your fees and the investment options that are offered. Some 401(k) plans have low management fees and have a wide variety of investment options, while others may have high fees and come with limited investment options. Depending on how your plan is set up, you may want to explore your new employer’s 401(k) plan and determine if it makes sense for your time horizon and investment objectives.
It’s also important to note that depending on your account size, you may be required to move your money. Every employer’s plan is set up differently and has different requirements for keeping your money there. Upon your transition to a new career or role, you may want to speak with the Human Resources department to see what they require for you to keep your money where it is.
Move your money to your new employer’s 401(k) plan
The fewer accounts you must manage, the easier it will be to manage your wealth. Therefore, you may want to consider moving your old 401(k) to your new employer’s 401(k). Before you do so, check with your new employer to determine if this is an option. Some plans don’t allow you to transfer your old 401(k) funds into your new account.
As stated above, make sure you review the fees and investment options before you do this. If your new 401(k) has high fees and limited investment options, you may want to explore other options such as opening an IRA account with a financial planner.
Roll your 401(k) into an IRA
Another option you may want to consider is to roll your 401(k) into an IRA. With a traditional IRA, you may have more control over the fees and investment vehicles you want to use in the account. If you already have an IRA, you may just need to fill out some paperwork with your financial planner to initiate the transfer.
If you don’t already have an IRA, it’s wise to partner with a financial planner to help you set up an account. Partnering with a financial planner can help you assess your financial goals and objectives. Then they will select investments that coincide with your goals and time horizon.
Additionally, if you consider yourself someone who likes to job hop, transferring funds to your IRA may be the best solution. Since there are no limits to the amount of 401(k)s you can roll over to your IRA, this may be the easiest way to keep all your accounts in one place.
You may also have the option to transfer your funds into a Roth IRA. If you have a Roth 401(k), you may be able to transfer the portion of your 401(k) that’s categorized as a Roth into your Roth account. If your 401(k) is not a Roth 401(k), it’s possible to convert your asset into a Roth IRA. Keep in mind, since you contribute to Roth accounts with after-tax dollars, you may have to pay income taxes on the amount you transfer. Speak with your financial planner before you move forward with a conversion. Your financial planner will be able to point you in the right direction.
Take the cash out of your 401(k)
Your last option is to take the cash out of your account. Taking the cash out of your account should be your last resort. While this may seem like the perfect way to get some quick cash, it could substantially harm your future retirement savings. There are three big reasons why you should avoid this option at all costs:
- You need a large sum of money to retire and every penny counts. You need your money working for you and creating compound interest to reach your retirement savings goal.
- You will be taxed on the entire distribution amount. All distributions from traditional IRA accounts require you to pay income taxes on the entire amount you take. If you live in a high tax state, this could cost you almost half of the distribution amount.
- If you’re not 59 ½, you will also have to pay a 10% penalty on your distribution. So, if you want to take out $5,000 from your 401(k), after taxes and the 10% penalty you will only receive $2,950 (assuming a 22% tax bracket, 6% state tax, and other penalties).
Pulling money out of your retirement account is one of the top reasons you may never reach true financial security. So, do yourself a favor and keep your money invested.
How to find previous 401(k) accounts
Now that you have an idea of what you should do with your old 401(k), you may have some previous 401(k) dollars that you have forgotten about. If you think you have 401(k) funds at a previous employer, here a few ways to locate old 401(k) money.
Contact your old employer
Perhaps the easiest way to find old 401(k) money is by contacting your previous employer. The Human Resources team should either have information on your account or be able to connect you with the company that holds your 401(k). They will also be able to provide you with information on how to roll your account to your new employer or to an IRA.
Reference old statements
If you cannot contact your former employer, you may want to search through your records to find an old 401(k) statement. This could be your tax returns or in the affiliated information that you keep on hand. These statements will typically have the information that you need to contact either the plan administrator or your previous company. When you contact either with this information, you can learn about your options for moving your money and how to do so.
Search for unclaimed retirement benefits
Employers can have trouble finding previous employees about their retirement benefits. There is a private company that set up a service called the National Registry of Unclaimed Retirement Benefits. This service allows you to search for any retirement plan balances in your name free of charge. It is important to note that this service only works if the employer participates in the service.
Look for corporate mergers
There is a chance that your previous employer no longer exists because it has been purchased by another company. If this is the case, your 401(k) may have been merged with the new company’s plan. If you are having troubles finding your previous employer, you may want to do some research to see if they were bought out by a new company. If so, you should be able to contact the new company’s Human Resources department to get information on your retirement benefits.
The bottom line
When handling your old 401(k)s, be sure to ask questions and understand all your options before making a decision. The more educated you are, the better financial decision you will be able to make. Also, enlist the help of a financial planner. A financial planner will be able to evaluate all your financial puzzle pieces and decide which direction is best to help you achieve your financial goals.
If you’re looking for a retirement planning partner who can help you realize your financial goals, we have retirement planning offices in Redmond, Seattle, Mill Creek, the Tri-Cities region, and Denver. Our firm focuses on helping retirees and those preparing for retirement achieve financial freedom by creating a plan that shows them how they can have the income they need and want until they turn 100.
If you’re ready to take the first step to achieving your retirement goals, our team is ready to assist you. We’ve helped hundreds of couples and individuals smoothly transition into retirement with confidence, and we’d like to do the same for you.