Got a new job? Good for you! Before you get too comfy in your new role, it’s important to tie up all the loose ends at your old one. And by that, we mean your old 401k. If you were lucky enough to be one of the over 58 million Americans contributing to a 401k, you may be wondering how to handle the situation. Well, leave it alone may not the best choice. Don’t worry though! We’re here to help you keep your retirement savings going by explaining what to do with an old 401k.
Your four main options for your old 401k
Your 401k is an investment vehicle for retirement offered by many employers. You have four primary options when it comes to handling a 401k you can no longer contribute to. These include:
- Leaving it with your old employer
- Rolling over your plan to your new job
- Cashing it out
- Rolling it into an IRA
While each of these options are possibilities, there’s only one real option we recommend, and that’s rolling your old 401k into an IRA. Still, we’ll cover all the options below so you can make the choice that’s right for you. But first, let's discuss why you shouldn't leave your old 401k with your old employer.
Why you shouldn’t leave your old 401k with your old employer
It is usually possible to leave your account with your old employer if you have more than $5,000 saved up, but there are a number of drawbacks to this. The biggest and most important one is that you can no longer contribute. To keep investing, you’ll have to enroll in your new company’s 401k, meaning you’ll be juggling multiple statements every month. Talk about a headache.
Another problem? You’ll have to pay a ton of maintenance fees and expenses. Since you no longer work there, your old employer may charge you a higher plan administration fee to manage your account. You may also have to pay investment or individual service fees depending on how your account is set up.
There are occasions where it might make sense to leave your money where it is. If you love your company’s investment options and they have a lot of professional guidance, it might be worthwhile to stay. But otherwise? It’s time to look elsewhere.
Is rolling your 401k plan into your new employers’ plan a good idea?
A slightly better option for what to do with an old 401k is rolling it into your new employer’s plan. That way, you’ll have more control over your new and existing contributions and everything will be consolidated.
That said, it’s still not something we’d recommend, as you’ll have limited investment opportunities. The average 401k plan only offers 28 investment options, which doesn’t give you a ton to pick from. And mutual funds account for 45% of 401k investments, so if that’s not something you’re interested in, you’ll be even more limited. It’s important to check out the portfolio options your new employer participates in before switching, as you don’t want to lock into something that will make you less money. Even then, you won’t be able to determine exactly where your money goes.
Finally, you may be facing a waiting period before you can contribute to your new 401k. The average delay is six months, though for some companies, it’s even longer.
Thinking of cashing out your old 401k? Think again
After all of this, you might think — isn’t it easiest to just cash out my old 401k and start over? Unfortunately, not quite. If you try to cash out your 401k before age 59.5, you’ll face a 10% penalty. While there are exceptions, they typically include grim things like death, disability, and medical need. And that’s not counting the federal and state taxes you’ll need to pay. When all is said and done, you might lose 40% of your money. Even if you do reinvest your money right away, you’ll lose so much during the process that it will take years to recover it.
Our recommended option: Consider turning it into an IRA
We think that putting your old 401k funds into an IRA is the best option for when you quit your job. One of the biggest benefits is that you won’t need your employer’s approval when deciding how, when, and where to invest funds. This includes choosing what funds to invest in. Second, there’s no waiting period to contribute! Put up to $6,000 (the maximum yearly contribution for this account type) into the account the first day you open it if you’d like. And finally, IRAs typically have far lower fees than a workplace plan, saving you big over the years.
Difference between a traditional IRA and Roth IRA
When it comes to choosing an IRA, you’ll have two main options: a traditional IRA and a Roth IRA. The main differences between the two come down to taxes. With a traditional IRA, the money you put into your account won’t be taxed until you withdraw it. This means you don’t need to pay any taxes on it now.
A Roth IRA, on the other hand, makes your investments taxable now. However, you won’t pay any taxes when you withdraw the money, which can be a good thing if the tax rate goes up in the future.
How to set up your new IRA
Setting up an IRA is easy and should not take too much of your time. First, you’ll want to browse the different accounts available. The main thing to look at are transaction, commission, and management fees, as these can vary greatly between providers.
Once you’ve found the right account, the next step is filling out paperwork. This will require your personal details and contact information. After the account is open, get in touch with your old employer to have them initiate the transfer into the IRA. Make sure not to get a check for your funds, as this might count as cashing out the money.
Next, you’ll have to pick the right investments for you. You can create a mix of index funds, ETFs, and more to meet your needs. Finally, your money should be happily settled in its new home!
Find the fit for your old 401k
Starting a new job is exciting, but don’t forget to tie up all the loose ends with your old 401k. With the right decision, you can maximize your wealth and secure your retirement fund. After all, wouldn’t it be great to have an early retirement because you planned ahead?