How to Rollover Your Old 401(k)
When you leave a job, what happens to your old 401(k) account?
Do you know where all of your retirement accounts are? A 401(k) plan can be a source of retirement savings, but it can be challenging to manage when switching jobs or retiring. Fortunately, you have several options for managing your old 401(k) accounts, and it is never too late to roll over an old account. So what options do you have?
There are a few available to you: keep it in your old employer's 401(k) plan, roll it over into a new employer's 401(k), roll it over into an Individual Retirement Account (IRA), or cash it out.
Cash Out the 401(k)
One option for your old 401(k) is to cash it out. While this option may be tempting if you need the money for an emergency or other purpose, cashing out can result in significant tax penalties. You'll also miss out on the potential growth of the account if you don't reinvest the funds. Plus, you'll be robbing yourself of retirement savings that could be growing for years to come.
However, if you still decide to cash out your old 401(k), you will need to contact the financial institution that manages your old 401(k) and request a distribution. They will likely provide you with forms to fill out and instructions for completing the distribution. Keep in mind that you will be subject to income tax and a 10% early withdrawal penalty if you are under 59 1/2 years old.
Keep it in your old employer’s 401(k) plan
You can opt to keep it with your old plan and not move it at all. The positive here is less work for you! The tradeoff is this is another account to remember, will you remember it is there 5, 10, or 30 years from now when you reach retirement? Additionally, sometimes there can be additional fees that you could be charged. Most times employers cover them but once you are no longer an employee they pass them on to you.
If you choose to leave it in your old plan it is important to understand the fees and be sure what you are invested in inside this account is still in alignment with your investment strategy.
Roll Over to a New Employer's 401(k)
Another option for managing your old 401(k) is to roll it over into your new employer's 401(k) plan. This option can be advantageous if your new employer offers a good plan with low fees and strong investment options. By rolling over your old 401(k), you can simplify your retirement savings by keeping everything in one place. Additionally, rolling over to a new 401(k) plan may allow you to continue contributing to the account, which can help you reach your retirement savings goals faster.
To roll over your old 401(k) to a new employer's 401(k) plan, you will need to contact the financial institution that manages your old 401(k) and request a rollover. They will likely provide you with forms to fill out and instructions for completing the rollover. Once you have completed the paperwork, the financial institution will initiate the rollover process and transfer the funds to your new employer's 401(k) plan.
It's important to note that not all employers offer 401(k) plans, and some may not allow you to roll over funds from a previous 401(k) plan. Before making any decisions, be sure to check with your new employer's HR department or plan administrator to see if rolling over your old 401(k) is an option
Roll Over to an IRA
Another option for managing your old 401(k) is to roll it over into an Individual Retirement Account (IRA). This option can be the most beneficial by giving you more control over your investments or if your new employer doesn't offer a 401(k) plan. Rolling over to an IRA can also provide you with more investment options than typically offered in a 401(k) plan, allowing you to choose investments that align with your retirement goals.
To roll over your old 401(k) to an IRA, you will need to choose a financial institution that offers IRA accounts and contact them to initiate the rollover process. They will likely provide you with forms to fill out and instructions for completing the rollover. Once you have completed the paperwork, the financial institution will initiate the rollover process and transfer the funds to your new IRA account.
When choosing an IRA, it's important to consider the fees associated with the account and the quality of investment options available. Be sure to shop around and compare different financial institutions before making a decision.
If you know this is the right option for you, there is a service that can help you to roll over your 401(k) to an IRA. A company called Capitalize takes some of the work off your hands to find your old 401(k)’s and help you roll them over into an account of your choosing. It is a free service for you to utilize that you can learn more about here.
How to Choose the Best Option for You
Deciding which option is best for you depends on several factors, including the fees associated with your old 401(k), the quality of investment options available, your current and future income tax brackets, and your overall retirement savings goals.
One important factor to consider when making your decision is the fees associated with each option. Both employer-sponsored 401(k) plans, new employer-sponsored 401(k) plans, and IRA accounts may charge fees for maintenance and investment management, and the fees can vary significantly between different providers. To help you evaluate the fees associated with each option, look for the following:
Maintenance fees: These are fees charged by the provider to maintain your account. They may be charged annually or monthly, and can range from a few dollars to several hundred dollars per year.
Investment management fees: These are fees charged by the provider for managing the investments in your account. They are typically charged as a percentage of the assets under management and can range from less than 0.1% to more than 1% of your account balance.
Transaction fees: These are fees charged by the provider for each transaction you make in your account, such as buying or selling investments. They may be charged as a flat fee or as a percentage of the transaction amount.
In addition to fees, you should also consider the quality of investment options available with each option. New employer-sponsored 401(k) plans and IRA accounts may offer different investment options, and the quality of those options can vary significantly. Look for plans and providers that offer a diverse range of investment options, including low-cost index funds, actively managed funds and other investment vehicles that align with your retirement savings goals.
Rolling over your old 401(k) is an important decision that can have a significant impact on your retirement savings. By understanding your options and considering the fees and investment options associated with each, you can make an informed decision that aligns with your individual circumstances and retirement savings goals.
Want to learn more about 401(k) Rollovers?
Check out the recording from an event we hosted How to do a 401(k) Rollover and Stop Leaving Money on the Table.