What to Do with Your Old 401(k)?

Are you wondering what options are available to you when it comes to dealing with your old 401(k) account? Whether you have changed jobs, retired, or are looking to consolidate your retirement savings, it’s essential to understand the various choices you have.

In this article, we will discuss in detail what to do with your old 401(k) and provide you with valuable information and insights. We’ll cover topics such as rolling over your 401(k), transferring it to an IRA, leaving it where it is, or cashing out. By the end of this guide, you should have a clear understanding of how to proceed with your old 401(k) account and make an informed decision that aligns with your financial goals.

1. Roll Over Your 401(k)

Rolling over your old 401(k) account into a new retirement savings vehicle can be a smart move for many reasons. It allows you to maintain the tax-deferred status of your funds while giving you more control over your investments. There are three primary types of rollovers to consider: direct rollover, indirect rollover, and rollover into a new employer’s plan.

1.1 Direct Rollover

A direct rollover is when you transfer the assets from your old 401(k) directly to another tax-advantaged retirement account, such as a Traditional IRA or a Roth IRA. This transfer is done without any tax consequences or penalties, as long as the funds are transferred within 60 days of receiving them.

Direct rollovers are generally recommended because they avoid the risk of mistakenly triggering an unintentional taxable event or early withdrawal penalties. Additionally, by moving your funds into an IRA, you gain more investment choices and flexibility compared to what may be available within a 401(k) plan.

To initiate a direct rollover, you should contact the financial institution where you plan to open your new retirement account (such as a brokerage firm or mutual fund company). They will provide you with the necessary paperwork and guide you through the process.

1.2 Indirect Rollover

An indirect rollover, also known as a 60-day rollover or a “rollover-to-yourself,” involves personally withdrawing the funds from your old 401(k) and then depositing them into another eligible retirement account within 60 days. In this case, the distribution check will typically be made payable to you directly.

While an indirect rollover may seem straightforward, there are certain risks and limitations associated with it. Firstly, if not completed within the allotted timeframe (60 days), it can result in taxes and early withdrawal penalties. It’s important to note that only one indirect rollover per year is allowed for each IRA account holder.

Moreover, with an indirect rollover, there is a mandatory 20% federal tax withholding unless you choose to roll over the full amount, including the withheld taxes, within 60 days. To avoid the tax withholding, it’s best to opt for a direct rollover instead.

1.3 Rollover into a New Employer’s Plan

If you have changed jobs and are starting a new position with an employer who offers a retirement plan, you may consider rolling your old 401(k) into your new employer’s plan. This option provides convenience by consolidating your retirement savings into one account and still allows for tax-deferred growth.

Before deciding on this option, it’s essential to evaluate the new employer’s plan’s terms, investment options, fees, and overall quality. Compare it with the benefits of rolling over to an IRA or leaving your old 401(k) where it is. Sometimes, an employer’s plan may restrict certain investment choices or have higher fees compared to opening an IRA.

2. Transfer Your 401(k) to an IRA

Transferring your old 401(k) funds into an Individual Retirement Account (IRA) is another common option. An IRA offers numerous advantages such as broader investment options, potential lower fees, and more control over your retirement savings.

To initiate a transfer from your existing 401(k) account to an IRA, follow these steps:

1. Research and compare different IRA providers: Look for reputable financial institutions that offer attractive features such as low fees, robust customer support, user-friendly interfaces or useful tools like portfolio rebalancing or automatic investing.
2. Open an IRA account: Once you’ve decided on an institution that aligns with your requirements, open an account with them by completing the necessary paperwork.
3. Contact the IRA provider: Reach out to the IRA provider and inquire about their specific process for receiving 401(k) transfers. Provide them with the information they require, such as your old 401(k) provider’s contact details.
4. Complete the transfer paperwork: The IRA provider will guide you through completing the appropriate transfer forms. They may request additional documentation such as your old 401(k) summary plan description or recent account statements.
5. Follow up and monitor progress: Stay in touch with your new institution to ensure a smooth transfer of funds from your old 401(k) to the newly opened IRA account.

During this transfer process, it’s crucial to be mindful of potential fees or taxes associated with the move. Some providers may charge an initiation fee or have restrictions on certain types of investments.

3. Leave Your 401(k) Where It Is

Leaving your old 401(k) where it is might not be at the top of your mind, but it could be a viable option depending on your situation. This option is particularly relevant if you’re happy with your current employer’s retirement plan, find comfort in its investment offerings, or wish to take advantage of any unique features offered by the plan.

However, several factors should be considered before deciding to leave your old 401(k):

• Administrative fees: Assess whether you are being charged high administrative fees that eat into your savings over time.
• Investment choices: Evaluate the investment choices available to you within the existing 401(k). If those options are limited or underperforming, you might want to explore other alternatives.
• Consolidation preference: Consider the ease and efficiency of consolidating multiple retirement accounts into a single account versus managing separate accounts.
• Company stock holdings: If you have company stock in your old 401(k), evaluate whether any special tax benefits associated with net unrealized appreciation (NUA) apply to you. NUA allows you to potentially reduce the overall tax burden when distributing company stock holdings.
• Legal protection: In some cases, 401(k) funds may receive additional legal protections against creditors compared to IRA accounts. Consult with a financial advisor or attorney for proper guidance if creditor protection is a concern.

Ultimately, leaving your 401(k) where it is might be the right choice if the plan meets your current and future needs without subjecting you to unnecessary fees or restrictions.

4. Cash Out Your 401(k)

Cashing out your old 401(k) is generally regarded as the least favorable option due to the potential tax implications and penalties involved. However, it may be necessary in certain circumstances, such as financial emergencies or extreme needs.

Here are some key considerations regarding cashing out your old 401(k):

• Taxes and penalties: If you withdraw funds from your old 401(k) before reaching age 59½, the distribution will typically be treated as ordinary income and subject to income taxes. On top of that, you might be subject to an early withdrawal penalty of 10% unless you qualify for an exception.
• Loss of future growth: By withdrawing funds from your retirement account prematurely, you’re effectively reducing the amount available for future growth potential.
• Opportunity cost: Money withdrawn from a retirement account today means missed opportunities for it to compound over time. This can have a significant impact on your overall retirement nest egg.

Before deciding to cash out your old 401(k), explore all other alternatives thoroughly. If you’re facing financial hardships, consider seeking advice from a qualified financial professional who can help assess your situation holistically and recommend the most suitable course of action.

Conclusion

Deciding what to do with your old 401(k) requires careful consideration and evaluation of various factors. While the options to roll over your 401(k) into an IRA or a new employer’s plan provide more flexibility and control, leaving it where it is or cashing out may be suitable in certain circumstances. Keep your long-term retirement goals in mind when making your decision and consult with financial professionals who can offer personalized advice based on your situation.

Remember, the ultimate aim is to preserve and grow your retirement savings while minimizing taxes, penalties, and unnecessary fees. By understanding the alternatives available to you and weighing the advantages and disadvantages of each option, you can make an informed choice that aligns with your financial aspirations and secures your future.