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New Job? 3 Things You Can Do With Your Old 401(k)

When you leave or change jobs, you can no longer contribute to your 401(k) account. That doesn’t mean you should cash out and call it a day. In fact, that’s not a good idea for a few reasons. In addition to annihilating your retirement savings, you lose the benefit of allowing that money to grow tax free (which can add up to 10s or even 100s of thousands in the long run). You will also face a tax bill on those assets and be penalized an additional 10%.

As a quick refresher, a 401(k) is a type of account in which you can choose to save part of your paycheck for retirement directly through payroll deductions. These accounts are provided to you by your employer and are a great way to automate retirement savings.

When you hit your 30s, if you’ve had a few job changes, it’s likely you have a couple old 401(k)s still floating around. It’s not uncommon to forget about what you have or where it is. Even if you’re using an aggregator like Mint.com to keep track of things, it’s good to know your options. When it comes to what you can do with your old 401(k)s there are three main things you can do. Leave it where it is, roll it to your new employer’s retirement plan or roll it into an Individual Retirement Account (also known as an IRA). Let’s take a look at each.

Leave It Where It is

This is our least favorite option. Because 401(k) plans are administered by a 3rd party (the plan provider) on behalf of your employer (the plan sponsor), there is usually an additional layer of fees on the account. Also, in most 401(k) plans, the investment choices are limited to a small selection of the investing universe. These options are not always the best possible ones. Finally, if you have more than one old retirement plan, it becomes very hard to keep track and make sure the investments are all working together. Multiple passwords and websites to keep track of mean you’ll likely forget about or neglect to take care of the account.

Move It To Your New Employer’s Plan

We love the idea of consolidating all your old 401(k)s into one account. Your new plan will give you the option to roll (move) your old plan into your new one. One thing to keep in mind is that if your new employer offers a match, it will not apply to or affect the old assets being rolled in. As we discussed earlier, your old money once invested, will be subject to that additional layer of fees charged by the 3rd party administrator. And you’ll likely still be stuck with limited investing choices.

Move It To Your Own Personal IRA

An IRA (Individual Retirement Account) is a type of retirement account that you open for yourself, rather than with your employer. There are no taxes or penalties to move your money from a 401(k) to an IRA. You can open up an IRA at a variety of financial institutions and roll ALL old plans into this single account. Good To Know: once you contact your old employer and they cut a check from your old 401(k) you have 60 days to deposit it into your IRA to avoid any taxes or penalties. A big benefit is that you will now have the entire investing universe to choose from, making it much easier for you to manage the investments and risk profile. Just like a 401(k) you can’t touch this money until you’re 59 ½ and you receive the benefit of tax-deferred growth (as the money grows in the account, you don’t pay taxes on it).

What is a 401(k) Rollover?

When you contribute money to a retirement plan, certain rules prevent you from accessing those funds until later in life, usually age 59 ½. If you try to access the money sooner, there are taxes and penalties to pay. In order to avoid any such negative consequences, you’ll want to do a rollover which means you move the money from one qualified account, like a 401(k) to another qualified account, like an IRA, within 60 days. A properly executed rollover won’t trigger any taxes or penalties.

If you need help deciding which option is best for you, the Stash Plan™ can help!