With Americans changing jobs an estimated twelve times over the course of their working lives, having multiple forgotten 401(k)s isn’t an uncommon occurrence. In fact, according to estimates, there are 24 million “forgotten” 401(k) accounts in America with a combined worth of $1.35 trillion! Regardless of how small or insignificant these individual accounts may seem to be at first glance, leaving 401(k) funds behind can cost you significantly in retirement. Luckily, there are options when it comes to what to do with an old 401(k).
Options for What to Do With Your Old 401(k)
The most common options for dealing with an old 401(k) include leaving it with your former employer, cashing out, rolling it into an IRA, or rolling it into a new employer's plan. Each option has its pros and cons and depends on your individual circumstances. Let's take a closer look.
- Leaving It With Your Old Employer: Leaving your 401(k) with your former employer is the simplest option and allows you to keep track of all of your retirement savings in one place. However, the downside is that this strategy limits your investment options and could result in higher fees due to lack of competitive pricing from service providers.
- Cash Out: Cashing out a 401(k) from a previous employer may seem like an attractive option because it puts cash money in hand quickly but this route should be avoided if possible as taxes will apply immediately and penalties for early withdrawal could be steep. Furthermore, cashing out eliminates potential tax-deferred growth, which could add up significantly over time depending on market conditions and inflationary pressures.
- Rollover Into an IRA: Rolling over a 401(k) into an IRA can be a financially savvy decision with many benefits. Investing in an array of stocks, bonds, and other assets and potentially lowering fees by consolidating accounts are just the start; flexibility over when to take distributions from your account is also possible with IRAs, whereas this option may not exist within 401(k)s. Furthermore, penalty-free withdrawals for expenses like higher education costs or first time home purchases have the potential to provide you with even more flexibility. Rolling over your 401(k) into an IRA can either be done via a direct transfer or by utilizing the 60-day rollover option. The first is typically simpler, though not all employers accept this route. Should you choose to go with the latter method, it's essential that you deposit money from your old employer’s plan into your IRA within sixty days of withdrawing; otherwise tax and penalty fees may apply as if cash was disbursed in full.
- Rollover Into a New Employer's Plan: If you change employers, rolling your old 401(k) funds into the new plan might seem like an ideal option to keep all of your retirement savings in one place. However, it is important to consider several factors before doing so. For instance, not all of the funds from a previous employer's 401(k) can be rolled over at once and it may be best for an individual wait until they are vested with their new company prior to transferring any money, since this will allow them to avoid taxation or penalties on those withdrawn amounts later down the line if needed. Ultimately understanding these nuances upfront could save you time and resources when considering your options around moving investments between jobs!
Steps To Take When Rolling Over Your 401(k):
When deciding whether or not to rollover a 401(k), there are several steps that should be taken into consideration before making any final decisions. First, make sure that you know the details of each account that you plan on rolling over – this includes the current balance, fees associated with the accounts, and any restrictions imposed by the plans. Next, get a copy of your most recent statement for each account that you intend on rolling over so that you have accurate information about the accounts at hand. If possible, consider transferring all funds into one account; otherwise choose where to invest each fund separately based on its performance history and future potential returns. Finally, consider working with a financial advisor who can help guide you through these decisions and protect against unfavorable scenarios such as questionable investments or too-high fees.
Our team at Triada Advisors is here to help if you have questions regarding your 401(k). We want to help you maximize your retirement savings live the life you want and focus on what you love.