So, you’ve landed a new job! Congrats! Along with the excitement of a fresh start, you might be wondering what to do with your old 401(k). A 401(k) is like a special savings account for retirement that your old company might have set up for you. Don’t worry; moving it to your new job, or somewhere else, isn’t as scary as it sounds. This guide will break down the steps and options, so you can make the best decision for your future.
Understanding Your Options: Rolling Over Your 401(k)
One of the first questions people have is: **What are the main ways I can move my 401(k)?** You’ve got a few choices, each with its own ups and downs. The most common way is to “roll over” your 401(k). This means you transfer the money from your old plan to a new retirement account. This could be your new employer’s 401(k) plan or an Individual Retirement Account (IRA) you set up yourself. You can also choose to leave the money where it is, in your old employer’s plan, if they allow it. And lastly, you can cash out your 401(k), but this is usually not a good idea because you’ll pay taxes and possibly penalties.
Rolling Over to Your New Employer’s 401(k)
Transferring your money to your new job’s 401(k) can be a simple move. Your new company’s plan might offer good investment choices and low fees, which can help your money grow. First, find out if your new employer’s plan accepts rollovers. You can usually find this information on the company’s benefits website or by asking the HR department.
Next, you’ll need to get some information from your old 401(k) provider. This might include your account number, the name of the plan, and the contact information for the provider. You’ll need this information to fill out the forms. Make sure you gather all of this information before you start the process. Double-check everything for accuracy to avoid any delays.
Then, contact the new 401(k) provider. They will give you the necessary paperwork. You’ll likely need to fill out a “rollover form” and provide details about your old 401(k) account. The new plan will then work with your old plan to transfer the money. It’s usually a direct transfer, meaning the money goes from one account to the other without you ever touching it.
Finally, make sure you understand how the new plan works, what investment options are available, and how the fees are structured. Consider the investment options available within the new plan. Look for a variety of options and see if they match your comfort level for risk. Don’t be afraid to ask questions about the different investments available!
- What are the investment options?
- How are the fees structured?
- What is the process for changing investments?
- Can I contribute to the plan?
Rolling Over to an IRA (Individual Retirement Account)
An IRA is another common choice. You open an IRA with a financial institution like a bank, brokerage, or credit union. You can then transfer your 401(k) funds into the IRA. One of the biggest benefits of an IRA is that you often get a wider range of investment choices than you might find in a 401(k). IRAs come in different types, and you should select the type that best fits your retirement plans.
There are two main types of IRAs: traditional and Roth. With a traditional IRA, your contributions might be tax-deductible, which means you could lower your taxes now, but you’ll pay taxes on the money when you withdraw it in retirement. A Roth IRA, on the other hand, uses after-tax dollars, which means you don’t get a tax break now, but your withdrawals in retirement are tax-free.
To roll over your 401(k) to an IRA, start by opening an IRA account. Then, contact your old 401(k) provider and tell them you want a direct rollover to your new IRA. They’ll usually handle the transfer directly. When you open the IRA, choose a financial institution that offers a good selection of investment options and has low fees.
Be aware of any deadlines. You may have a limited amount of time, usually 60 days, to complete the rollover from the time you receive a check from your old 401(k) provider. After 60 days, the rollover will no longer qualify for tax benefits. Consider the following timeline for completing the rollover:
- Open an IRA.
- Contact your old 401(k) provider and request a rollover.
- The funds are transferred to your new IRA account.
- Review your new IRA account and investment selections.
Leaving the Money in Your Old 401(k)
You can sometimes leave your money in your old 401(k) plan. This might be a good option if you like the investment choices and the fees are low. Most plans allow you to keep your money invested after you leave the company, especially if you have a certain amount of money saved up, but it depends on the plan’s rules. Check with your old employer’s HR department or your 401(k) provider to see if this is an option.
One of the downsides of leaving your money where it is is that you will not be able to contribute to the account, unless you are still employed by the company. There will also be no employer match. And it can become more difficult to keep track of your money if you have multiple retirement accounts scattered around. It’s really up to you to weigh the pros and cons.
However, some plans might require you to move your money if the balance is below a certain amount. If your balance is low, the company may have a policy to issue you a check, which must be rolled over within 60 days to avoid taxes and penalties. In that case, your options will be more limited.
Consider these things when deciding:
| Pros | Cons |
|---|---|
| Might be easy if you like the investments. | Can be hard to keep track of. |
| Fees may be low. | You can’t contribute to the account. |
| No fees on the investment of any contributions. | You won’t receive any additional employer matching funds. |
Cashing Out Your 401(k): A Risky Move
Cashing out your 401(k) means taking the money out as cash. While it might seem tempting, especially if you need the money now, it’s generally not a good idea. When you cash out, you’ll have to pay taxes on the money, and you’ll likely also pay a 10% penalty if you’re under age 59 1/2. This can really eat into your savings and hurt your retirement plans.
For example, if you cash out $10,000 and are in the 22% tax bracket, you’ll owe $2,200 in taxes, plus a 10% penalty of $1,000. That leaves you with only $6,800 – and you’ve lost the potential to grow that money over many years. Your retirement will also suffer as a result, because you won’t have the money you worked so hard to save, compounding over time.
If you’re really struggling financially, there might be a few exceptions where you can avoid the 10% penalty, like using the money for certain medical expenses or to cover the cost of college. But, you’ll still have to pay taxes. However, these circumstances don’t mean that this is a good idea.
If you are contemplating cashing out, try considering other options. Before cashing out your 401(k) retirement plan, look into other options. Are there cheaper alternatives like:
- Personal loans from a bank
- Credit union loans
- Borrowing from family and friends
- Credit cards
Making Your Decision
Choosing the right way to transfer your 401(k) is about your individual needs and goals. Think about the following steps when making your decision. You should also make the following considerations:
- Investment Options: What investments does each plan offer? Are there ones that interest you?
- Fees: What are the fees for each plan? Will it impact your investments?
- Convenience: What’s the easiest option for you?
- Future Needs: Do you think you will need to access this money anytime soon?
Compare the investment options. Look for diverse options that fit your risk tolerance. Research the fees and costs associated with each plan. Compare them closely because fees eat into your returns. Also, consider convenience when it comes to filling out paperwork and keeping track of your investments.
Do your research, weigh your choices carefully, and think about what’s best for your financial future. If you’re unsure, it’s always a good idea to talk to a financial advisor. They can help you understand your options and make a plan that fits your personal situation.