What should I do with my old 401k?
Four options to consider if you have a 401k at a previous employer
Do you have a 401k balance that is languishing with a previous employer? Are you ready to leave your current job, but wondering what to do with the balance in your 401k? If so, here are four suggestions you may want to consider.
Leave it in the old employer’s plan
The “path of least resistance” option is to leave the balance in your old employer’s plan. If you have over $5,000 in the 401k account, this option should be available to you.
One issue with leaving your 401k with a former employer is you may want to sever ties. Having your 401k there will prevent you from completely doing so. Secondly, if you are not actively contributing to the 401k plan, you may not be giving the account the attention it deserves. Forgotten accounts may need to be rebalanced, or the fees associated with the plan may have increased. If you are not actively monitoring the account, it may not be performing as well as it should. If you decide to use this option, make sure you are keeping a watchful eye over it.
Roll it over to the new employer’s plan
A second option is to roll it over into your new employer’s plan. Once the funds are in the new plan, you will be able to invest the transferred balance with any additional contributions you make to the plan. Also, if you ever need to take a loan out from your 401k, the old balance will be added to the new when figuring out how much you can borrow. Finally, having the funds in one account will help you track the asset allocation, performance and fees associated with the account.
If you choose this option, reach out to your new company’s human resources department and ask them to help facilitate the transfer. The transfer should be a “trustee-to-trustee” transfer, and you should never take personal possession of the funds.
Roll it over to an IRA
The next option would be to rollover the 401k balance into an IRA (individual retirement account). IRAs offer the greatest number of investment options, and most are free to open. If you have multiple old 401k accounts, aggregating them into one IRA can make monitoring asset allocation and performance much easier.
Opening a rollover IRA is a simple process. You can open a free online account at one of the brokerage houses. Once the account is open, you can file the necessary forms to transfer the funds from the old 401k to the new IRA. It is highly recommended that you have the funds transferred directly to the IRA via a “trustee-to-trustee” transfer. Doing so will prevent you from taking possession of the funds and possibly becoming subjected to income taxes and penalties. Once the funds have been transferred into the IRA account, you are free to invest as you see fit.
Cash it out
The final option would be to cash it out. To do this, you would request the 401k plan administrator write you a check for the balance in the account. In most cases, if the balance is less than $1,000, the former employer is allowed to cut you a check without your approval. If over, they will likely need your authorization to do so. Once the check is cut, the 401k account is essentially closed, and you can spend the money as you wish.
The primary drawback with this option is the distribution will be subject to income tax. Additionally, if you are under age 59 ½, the distribution will be subject to an additional 10% penalty. If the amount is small enough, and not worth fussing over, this is definitely an easier option. But if the balance in your old 401k is substantial, make sure you consider the income tax and related penalty consequences prior to selecting this option.
Summary
Do not waste another minute wondering, “What should I do with my old 401k?” Whether you want to consolidate multiple old IRAs into one account, or just want to cash out a small balance, do it today! It may seem a little daunting at first, but dealing with an old 401k is a fairly straightforward process and will help you on your retirement planning journey.
About the author:
JP Geisbauer is a Certified Public Accountant and a Certified Financial Planner ®. He is the founder of Centerpoint Financial Management, LLC, a retirement planning, investment management, and tax planning firm located in Irvine, CA. If you have specific questions regarding your situation, please schedule a complimentary 30-minute call here.
Disclaimer:
This article is for general information and educational purposes only. Nothing contained in this article constitutes financial, investment, tax, or legal advice. Before taking any action on any topic discussed in this article, please consult with your financial planner, investment advisor, tax professional, and/or attorney for advice on your specific situation.