There are a lot of topics within personal finance that can spark debate among “experts” and economists; however today, I will highlight a less-controversial topic. Though important, I foresee no wadded panties towards the end of the post.
What To Do With Your Old 401(k)
With pensions disappearing, it’s likely that your dream of retirement depends primarily on your ability to save in your company’s 401(k) plan. For most people, this 401(k) will be the largest savings you ever accumulate so what you choose to do with it is highly important. Typically there will be 4 choices you have to choose from.
1. Roll It Over Into Your New 401(k)
It’s not guaranteed that your new employer will accept a rollover from your previous employer’s plan, but all you have to do is ask. If possible, this will keep things simple for you. One account designated for your retirement is as simple as it gets. It certainly beats having IRAs spread out all over the city.
The downside is that you’re limiting your investment choices. Not all 401(k) plans are created equally.
2. Roll It Over Into A New IRA
If you want the most options, this is the correct choice for you. An IRA is simply an umbrella. Underneath the umbrella, you can nearly invest in anything you want. You’re not limited to the options that your employer offers.
If you’re awful at making choices, have no fear. By rolling over your 401(k) into an IRA you’ll likely receive some guidance from a financial professional. In fact, there will be many advisers/brokerages jumping at the chance to gain your business.
3. Cash It Out
According to Staggering Financial Statistics, 60% of workers age 20-29 have cashed out their 401(k). One will typically choose this option out of desperation or lack of education. It’s by far the most costly.
By cashing out your 401(k), you will be taxed and penalized. Let’s say you have $50,000 in your 401(k).
- $5000 will disappear in the form of an early-withdrawal penalty.
- $12,500 will go to federal taxes.
- $3,500 will go to state taxes.
- You will get to keep approximately $29,000 .
4. Do Nothing
When is “doing nothing” ever the best option? Depending on the balance of your old 401(k), you may have the choice to leave it where it is. If it’s a relatively small amount, there’s a chance your company will send you a check in the mail.
Even if you’re extremely satisfied with the performance of your investments, I would still recommend rolling it over into an IRA. You should be able to keep the investments exactly the same.
With that said, I’m not sure why you would ever opt to leave it where it is.
Originally, I was not planning to advise you on what you should do with your old 401(k). My plan was to present the facts and and simplify the decision for you. Upon doing so, I found myself leaning strongly towards option #2. Rolling over the 401(k) into an IRA will give you the most control and flexibility – two things I look for in both investments and women.