If you've ever had any type of job you've likely had a 401k retirement account.
And if you ever leave that job, of have left a job, you might be wondering, "What do I do with my old 401k?"
That's a good question because your 401k will be, or already is, one of your largest assets you'll ever have. So it's important to know what to do with it. And luckily you have several options that are available to you. So, before you do anything with that old 401k it's important to talk to a financial planner and discuss each option you have with your old 401k and pick the best option for you based on your overall retirement planning, tax planning and investment management goals.
Moreover, it's important to note that after you leave a company you, and the company, are no longer contributing to the 401k. Basically, no more money is going to be deposited into the 401k. It'll still be your money but it'll just be sitting there. And sometimes this can be a substantial amount of money that is just sitting there in your old 401k. So it's important not to forget about it and make a decision on what to do with it.
Your first option is pretty simple.
You could nothing and just leave your old 401k in the current 401k plan it's already in.
As previously mentioned, you can't add money to this 401k and neither will your old employer; your old 401k will just sit there. You'll be subject to the available investments offered with the 401k plan and typically the available investment options within most 401k plans are somewhat limited.
You'll also need to deal with the old 401k servicing department and website if you'd like to manage the 401k or need any service with the account. This may a good thing or a bad thing depending on how helpful and quick the 401k serving department is whenever you need help with something.
Another thing to consider is that sometimes 401k plans change custodians. For example, maybe when you worked at your old company the 401k plan was with Fidelity, but then years later, after you've left the company, the 401k plan changes custodians and it's now at American Funds. When this happens you usually will get notified via email or mail so it's important to keep your information up to date with the 401k plan so you can be made aware of these changes if they happen. Nevertheless, even when you keep your information up to date it can be easy to lose track of these custodian changes making it harder to track down your old 401k if a custodian change happens.
However, this is obviously the simplest and easiest option for your old 401k in the short run because you don't have to do anything to just leave it in the current 401k plan.
The other option you have may or may not actually be available to you. But if you have a new job where you're participating in that company's 401k plan you may be able to roll your old 401k into the new 401k plan if the new plan accepts rollovers.
Just like if you left your old 401k in the old 401k plan, once your roll your 401k into the new 401k plan then you'll be subject to that 401k plan's available investment options and servicing department, which again, can be good or bad depending on the level of service you get and the available investment options.
Once you roll your old 401k into the new 401k plan then you most likely won't be able to roll it back out of the 401k plan.
Obviously this option isn't available to you if you don't have another 401k plan that you're participating in.
Another option that you have is to withdraw all the money out of your old 401k.
From a tax perspective, as well as within a well-crafted retirement plan, this likely isn't the best option.
Generally, all the money you withdraw from the 401k is going to be subject to ordinary income tax.
For example, let's say you have an old 401k at your old job worth $300k. You decide to cash in and withdraw your entire 401k plan balance and have the money deposited into your bank account. The IRS considers the entire $300k balance as income, and therefore, needs to be taxed as income.
If you're married with no other income sources that $300k would be taxed in the 24% marginal bracket, so you'll be looking at a pretty hefty tax bill!
And if you're under age 59 1/2 when you withdraw the 401k plan balance not only do you pay income tax on the $300k, but you also pay an additional 10% early withdrawal penalty as well. Add another $30k on top of your income tax bill!
If some of your 401k plan money is Roth money, then these withdrawals are also taxed as income and assessed a 10% early withdrawal penalty before age 59 1/2. And since Roth 401k money can give you tax-free withdrawals in retirement you don't want to touch this money before age 59 1/2.
As you can imagine, withdrawing from your 401k balance prematurely can really cost you. The taxes add up fast, and your net 401k plan balance gets smaller as a result. Not to mention that you just reduced a significant retirement asset that is supposed to be there for you as an income supplement in future years.
For obvious reasons, this option is usually not a wise one. Before you consider this option you need to speak with a financial planner, retirement planner, tax planner or wealth advisor to see how this decision would impact you and your future, because once you make this decision you can't un-do it.
Your last option is to "roll" your old 401k into an IRA in your name.
There are a number of benefits to rolling your 401k into an IRA in your name.
→ Doing a rollover is not a taxable event.
As long as you rollover your pre-tax 401k money into a traditional IRA and any Roth 401k money into a Roth IRA then you won't have to pay any income taxes or penalties. Once your 401k is in your IRA it still maintains the IRAs respective tax treatment (tax deferral for a pre-tax/traditional IRA and tax-free qualified withdrawals for the Roth IRA/Roth 401k) and the money can continue to be invested and grow.
→ When your money is rolled into an IRA you have many more available investment options to meet your personal investment objective and risk tolerance.
You are not limited to the investment options available inside your 401k plan. Within your IRA you can invest in stocks, bonds, mutual funds, ETFs, separately managed accounts (SMAs), CDs, etc. You literally have a much wider universe of investments to choose from.
You'll be able to tailor your portfolio exactly how you need to based on your retirement planning and tax planning goals and strategies.
→ Having the funds in an IRA can make it easier to do tax planning.
When your money is in your IRA you'll likely be working with an advisor that is helping you manage that IRA. When it's inside the IRA being managed by your advisor it makes it much easier for the advisor to recommend and execute any tax planning strategies as part of your plan.
For example, it will make executing Roth conversions (converting pre-tax IRA money to Roth IRA money) a much easier and seamless of a process. You and your advisor will know exactly what you have in your IRA, how much to convert and when it will be converted.
→ Having your money in your IRA allows you to simplify and consolidate your retirement assets into 1 account that you can have more control of and ease of service.
There's something to be said for the simplicity and ease of consolidation. Having accounts scattered at many different firms can make life harder on you and your advisor. From experience, I can say it's much harder to give solid and timely tax planning and investment management advice when there are assets scattered at many different firms and in different types of accounts.
Account consolidation makes the retirement planning, tax planning and investment management process much easier and more effective.
It really depends.
There's not one option that is always the "best" option.
It all depends on your specific situation (income, age, assets) and the goals (when you want to retire, retirement spending goal, etc.) that will dictate what the best option for you is. And, ultimately, the decision is yours.
The most important thing to consider though is that before you do anything with your old 401k you need to talk to a financial planner/wealth advisor and discuss what your retirement planning, tax planning and investment management goals are. Once you do that you'll find out what the best course of action is for you and then you can take the next steps.
If you have an old 401k that you don't know what to do with and you want to discuss your situation to see what the best option for you is then feel free to schedule a time to talk with me using the link below.
Happy retirement planning!