When you hit your 30s, it’s likely that you’ve had a few jobs and you have a few 401(k)s floating around – and it’s not uncommon to forget about what you have or even where it is.
And so, one of the most common questions that often arises is what should we do with our old 401(k)? When it comes to your options, there are three main things you can do: leave it with your old employer, move it to your new employer, or move it into your personal IRA.
Leave It Where It Is
There’s many companies out there that will allow you to keep your retirement savings in their plans after you leave your job. Since this option requires no action, it is often chosen by doing nothing. Because 401(k) plans are provided by a 3rd party (plan providers like Fidelity, Vanguard, Transamerica etc.) on behalf of your employer (the plan sponsor), there is usually an additional layer of fees on the account.
Also, although you may be familiar with the investment choices in your plan, in most 401(k) plans, the investment choices are limited to a small selection of the investing universe. And if you have more than one old retirement plan from previous employers, it becomes challenging to keep track and make sure the investments are all working together.
You can probably tell that this is our least favorite option.
Move It To Your New Employer’s Plan
For simplicity, transferring your old 401(k) to your new plan could make it easier to track your retirement savings.
Your new plan will give you the option to rollover (move) your old plan into your new one. Generally, the smartest move is to evaluate the fees charged by the investment funds and go with the plan that offers the most cost-efficient option.
Move It To Your Personal IRA
We’re huge fans of consolidating all of your 401(k)s into one account. Our top recommendation is to roll it over into an Individual Retirement Account (IRA), which is just a type of retirement account that you open up yourself, rather than with your employer. A big benefit is that the IRA offers flexibility and an entire investing world of 8,000 different mutual funds to choose from. In your 401k you only have the option of about 10 – and these options aren’t always the best ones.
How Do I Rollover a 401(k)?
When you contribute money to a retirement plan, certain rules prevent you from accessing those funds until later in life, usually age 59 ½ – and if you try to access the money sooner, you will have to pay taxes and penalties (with a few exceptions). It’s good to note that you’ll want to contact your old employer and do something called a direct transfer rollover. This way, the check will not come directly to you and you will avoid any penalties or taxes.
If you need help deciding on which option is best for you, we can help!