Austin Coley, CFP®
CERTIFIED FINANCIAL PLANNER™
What Should I Do With My Old 401(k)?
According to USA Today, Americans lost track of more than $7.7 billion worth of retirement savings in 2015 by “accidentally and unknowingly” abandoning their 401(k).
I found this statistic jarring, especially when I learned that the average person changed jobs 12 times over their career. For most Americans, long gone are the days of starting your first job and staying until retirement.
In fact, it happened to me.
When I was playing ball in the Pittsburgh Pirates organization, the team unveiled a new 401(k) plan for the minor league players. Knowing the importance of saving for retirement and taking advantage of an employer match, I signed up to contribute to the plan.
Fast forward to last fall, I was a year removed from professional sports when I received a statement for my old 401k. While it wasn’t a large sum of money, I had been dealing with all the responsibilities of life and had forgotten about the money in the plan.
That begs the question: What are the options for your old 401(k)?
Well, let’s take a look.
1. Leave the money in your old 401(k) plan
This option has the fewest barriers to execution, as you don’t have to do anything. While most plans will allow you to keep your money in the plan even after exiting the company, you will want to check with your 401(k) provider to make sure.
Pros
- No moving parts
- Familiarity with the current plan and investment options
Cons
- Lack of investment options
- Multiple accounts/statements
While the "do nothing" nature of this strategy is its biggest feature, it comes with the responsibility of maintaining different accounts at different employers. A couple of things to keep in mind when choosing this option are investment choices, fees, and structure inside of the old plan.
2. Move the money to your new 401(k) plan
Just like you would combine two bank accounts to simplify your finances, you can do the same with your old 401(k) plan. You will need to check with your new employer to make sure they accept transfers from old 401(k) plans (most do). If so, this is a great option to merge your accounts, simplify your finances, and reduce your statement clutter.
Pros
- Consolidation of assets
- Consistency in investment options
Cons
- Lack of investment options
- Inability to roll the assets into a Roth IRA
The simpler, the better. Rolling the assets into your current retirement plan will maintain the tax-advantaged nature of the cash. Things to keep in mind when exploring this option: investment options inside of your current plan and fees.
3. Roll the money into an IRA
Our third option involves opening an IRA (Individual Retirement Account) and rolling your money into it. Due to the pre-tax nature of an IRA, your money will maintain its tax-advantaged status in this route.
Pros
- Wide range of investment options
- Ability to work with a financial planner
- Roth IRA rollover eligibility
Cons
- 2 accounts (new 401k and IRA)
This option is all about… options. Moving your cash to an IRA will allow you more investment vehicles, as well as the ability to work with a financial planner to help manage the assets. Also, you can then roll your assets from your IRA to a Roth IRA if it makes sense for your situation.
“ The average person changed jobs 12 times over their career. For most Americans, long gone are the days of starting your first job and staying until retirement.”
4. Cash out your old 401(k)
While this isn’t the best option or even a good option, it is AN option. Choosing this strategy will subject you to income tax on the withdrawal, as well as a 10% penalty if you are under 59 ½. Unfortunately, many people choose this strategy without understanding the consequences.
Pros
- Spend the $$$ now
Cons
- Income tax on withdrawal
- 10% penalty if under 59 ½
- Reduction of assets in retirement
- Reduction of assets compounding in a tax-advantaged account
Going this route could hinder your retirement timeline. Even if your old 401(k) has a small balance, I’d recommend another option. Every little bit counts when saving for retirement.
Americans lost track of more than $7.7 billion worth of retirement savings in 2015 by “accidentally and unknowingly” abandoning their 401(k)
According to the USA Today
The Gist
When deciding what to do with your old 401(k), there are three good options, and one bad one. If you like your old 401(k) plan and think you can keep up with different accounts, consider leaving your assets where they are. If you love your new employer’s plan and want to consolidate your accounts, think about rolling your cash over to your new 401(k). Last, if you want to expand your investment options, work with a financial planner, and explore a Roth IRA conversion, look into rolling your assets into an IRA.
At McCall & Associates, we work with plenty of clients who want to use an IRA or Roth IRA. If this is something you want to learn more about, we would love to have a conversation to see how we can help. To connect with one of our three CERTIFIED FINANCIAL PLANNER™ Professionals, CLICK HERE.
5217 Maryland Way, Ste 401
Brentwood, TN 37027
615-370-4040
Any opinions are those of Austin Coley, CFP® and not necessarily those of RJFS or Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. First National Bank and McCall & Associates are not a registered broker/dealers and is independent of Raymond James Financial Services.