Most of you probably have 401ks because luckily most companies automatically enroll you when you start a job these days. But many people are not spending a lot of time at one company anymore so you may have multiple 401k accounts and you’re probably asking – what do I do with this old 401k account?? I’ve gotten this question from a few people recently so I figured it’s time to address it in a blog post!
You have a few options:
Keep the account as is.
- I know this is what most people will do because it is the option that requires no action. It’s not the end of the world to leave it but you have to REMEMBER that you have it, the password, how to get there, etc. We already live cluttered lives, you don’t need to have accounts all over the place. And sometimes the employer may just close your account without your say (this happened to me!) which could lead to…
Withdraw the cash.
- Short answer: Don’t do it!!
- Here’s why: First of all, the withdrawal will be subject to taxes and second, if you are under 59 1/2, you will also have to pay a 10% penalty. Depending on the amount of cash, you could wind up with quite a hefty bill to pay! And finally, you’ll set back your retirement goals!
Transfer to your new 401k account at your current employer.
- It’s not a horrible idea, BUT 401ks do not offer the most investing options. The choices are all up to the employer’s plan and they may not have the lowest-cost or best-growth funds. Also if you were laid off or plan to not work for a while, you may not have this option at all.
Rollover to a Traditional IRA
- In this case, you choose a brokerage firm that is unrelated to any employer and you open an account that is always yours no matter where you work. I like Vanguard, but it doesn’t really matter; Fidelity, TD Ameritrade, Charles Schabb, Capital One Investing, etc…these are all viable options! Then you “roll over” the 401k investments into a Traditional IRA. Remember that Traditional IRAs and 401ks are similar in that they are both tax-deferred accounts (the investments grow over the years and you only pay taxes when you withdraw funds in retirement) so this option is best if you can’t afford a tax bill on the lump sum of your account. **This is my recommended option in most cases** Your money continues to grow, it’s an account that’s all yours, you have a lot more investment choices, and your retirement is still on track! Plus, if you have several former employer 401k plans, you can keep rolling them over into the same account so everything is in one place!
Rollover to a Roth IRA
- Most of the Traditional IRA rollover commentary above applies EXCEPT that you have to pay taxes on the lump sum amount to do a Roth IRA rollover. But one of my a-ha’s was that if you had $50k to rollover, you couldn’t take the tax money out of that $50k. You’d have to rollover the full $50k to the new account and then cough up several thousand dollars from other sources to pay the tax bill. Why would you do this?! Well, Roth’s are great in the long run. By paying the taxes now, your money can grow tax free and your eventual retirement withdraws are tax free as well! I love Roth IRAs in general because what you see is what you get. If you have $100k in your account, you know you can plan on $100k in retirement with no consideration of tax skimmed off the top. With Traditional IRAs and 401ks, you always have to think about your tax bracket and how that will impact your withdrawal amounts. So, a Roth IRA rollover is a great option, but I don’t recommend it as I know most people can’t afford to pay taxes on the lump sum. If you’ve only been with an employer for 1-2 years and haven’t racked up a huge 401k yet, it might be doable!
401k – It’s your choice!
I’ve mentioned it in other posts, but if you’re overwhelmed by the sea of investment options in brokerage accounts, just go with an S&P Index Fund. You’ll get instant diversification and the fund mirrors the market…and no manually-managed mutual fund has ever outperformed the S&P in the long run!
If you’re overwhelmed by the paperwork and logistics of transferring accounts, I will tell you that a lot of the brokerage firms do the legwork for you! Rollovers are pretty common so as long as you have a few key data points from your 401k account, you’re usually good to go.
I’ve boiled it down for you, but if you want the nitty gritty detail, check out this Pros and Cons list for all of the options above.
What other questions do you have? Let me know in the comments below!