New office. New coworkers. New duties. As we all know, there are many things to prepare for when getting ready to start a new job. The transition can be an exciting one, but all too often many of us leave behind and ignore a very important asset – our 401k. Considering that employer-sponsored retirement plans, like your 401k, will make up a major portion of your retirement assets, it’s crucial that you consider your options when it comes to deciding what to do with a 401k from a previous employer. Not knowing what choices you have can often lead to some costly consequences.
So, what exactly are your options? Basically, you have 4 choices to consider – each with their own pros and cons.
Leave It Where It Is
Keeping your money in your old plan may be a good option for some, but this depends on a few things. Your ability to leave your money behind will depend on the rules of the old plan. Many plans will require that you meet certain minimum balances in order to let it stay put. When considering this option make sure you evaluate the investment options available. If your investment options are poor or your fees are relatively high, it may be better for you to consider another option.
While it’s tempting to take the cash, this choice can cause some serious financial damage that you may not be able to repair. When taken out, the 401k withdrawal amount will be considered taxable income, potentially increasing your tax burden and if you are younger than 59½, you may also have to pay a 10% penalty for taking the money out too soon.
Another thing to consider here is the missed growth potential. Even a balance $10,000 left sitting for 25 years (assuming an annual return of 7%) can end up growing to around $54,274 just by leaving it invested. Considering this option should be a last resort, used only in a dire-need situation.
A rollover IRA allows you to move the balance of an old plan directly to an IRA account avoiding the tax implications and penalties associated with a 401k withdrawal. These accounts will typically allow a wider range of investment options, as well as more flexibility when it comes to making withdrawals; however, keep in mind that you will be solely in charge of managing the account in addition to your new 401k, which could require more homework and dedication.
You will want to take into consideration the fees associated with opening and operating your IRA, as well as the fees associated with the investment options available. Review any minimum balance requirements necessary for investing with specific funds. And, if you have after-tax contributions from your 401k, you’ll need to separate those from any pre-tax contributions. Senior Adviser, Randy Schaller, discusses the different between pre- and after-tax 401k contributions in this video, Roth or Traditional 401k – Which is best for you?
Rollover to Your New 401k Account
Lastly, another rollover option is simply moving the money directly from your old 401k to your new 401k. This is a good option to consider if you would like all of your retirement funds in one place. You will want to review the options and rules for your new plan. Your new 401k will have a specific list of funds to invest in. Make sure you will be able to address your investing needs with this list. Not all 401ks allow rollovers from other plans, so check this option out before making up your mind.
Regardless of the decision you make, it’s important to stick to the 401k investment strategy that’s appropriate for you. As always, we encourage you to contact our advising team at 877-627-8401 or firstname.lastname@example.org to discuss your options and any impact your decision may have on your overall retirement plan.
What are some of your experiences in deciding what to do with an old 401k? Let us know in our comment section below.
Smart401k Associate Representative
*Nothing in this article should be construed as tax advice. Contact a qualified tax professional to discuss any tax matters relating to your retirement plan and investment options.
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Smart401k is a web-based investment advisory service providing unbiased recommendations to help people invest in employer-sponsored retirement plans. Smart401k provides service to nearly 11,000 clients who collectively have more than $2 billion in assets. Plan participants receive personalized, fund-specific investment recommendations and the support of professional investment advisers available to discuss all investment questions. Based in Overland Park, KS, Smart401k is online at www.Smart401k.com.