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A 401k is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their paycheck into a tax-deferred account. 401k plans are one of the most popular ways for Americans to save for retirement.
401k plans have many advantages, including the following:
But what do you do when you have moved to another job and your old 401k is just sitting there?
Keep reading to find out.
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What You Can Do With Your Old 401K
Did you land a new job? Congratulations!
However, before you get too comfortable with your new position, it is critical to tie all of the loose ends up with your old role. We are talking about your old 401k.
If you were fortunate enough to be among the more than 58 million Americans who contribute to a 401k, then you might be wondering how this situation should be handled.
The best choice might not be to leave it alone. However, don't worry! We are here to help make sure you retain your retirement savings and explain what you can do with your old 401k.
Four Main Options
Many employers offer 401ks. They are retirement investment vehicles. Four main options are available to you when you have an old 401k that you cannot contribute to any longer.
They include:
Although each of the four options is possible, we only recommend one, which is to roll your 401k into a gold IRA. However, we will still be covering all the options in this article so that you can make the best decision for yourself. However, let's first discuss the reasons why your old 401k should not be left with your former employer.
Why Your Old 401k Should Not be Left with Your Former Employer
Usually, your account can be left with your former employer if the balance is more than $5,000. However, there are several drawbacks to it. The most important and biggest one is that you cannot contribute any longer.
To continue to invest you will need to enroll in your new employer's 401k, which means you will multiple statements to juggle each month, which can be a big headache.
Another problem is you will need to pay tons of expenses and maintenance fees. Since you do not work there any longer, your former employer might charge a higher administration fee for managing your account.
Depending on the setup of your account, you might also have to pay individual or investment service fees.
There are times when it may make sense for your money to be left where it is. It may be worthwhile to stay if you love the investment options offered by your company and they provide plenty of professional guidance. Otherwise, you should look elsewhere.
Related Article: Can You Transfer 401k to IRA While Still Employed?
Is it a Good Idea for Your 401k Plan to be Rolled into Your New Employer's Plan?
When it comes to what to do with your old 401K, a slightly better option is to have it rolled into your new employer's plan. This will give you more control over your existing and new contributions and it will consolidate everything.
However, we still do not recommend it, since it only provides limited investment opportunities. Only 28 investment options are offered by the average 401k plan. This does not give you a lot to choose from.
Mutual funds make up 45% of 401k investments. Therefore, if you are not interested in mutual funds, you will be limited even more.
It is critical to review the portfolio options that are participated in by your new employer before making a switch since you do not want to get locked into something where you will earn less money.
You still will not be able to exactly determine where your money is going.
Finally, you might be faced with a waiting period before being able to contribute to a new 401k. Six months is the average delay, although it is even longer with some companies.
Think Again if You Are Thinking About Cashing Out Your Old 401k
With all of the above, you may be thinking it would be easiest to simply cash out your 401k and then start over. However, this is not true. If you cash out a 401K before you are 59.5 years old, you will be faced with a 10% penalty.
Although there are some exceptions, they tend to be grim things such as medical needs, disability, and death. And that does not count the state and federal taxes you will be required to pay. Ultimately, you may lose as much as 40% of your money.
Even if your money is reinvested right away, during the process you will lose so much that it will take many years to recover.
Our Recommended Option: Turn Your 401k into an IRA
We believe the best option for when you are quitting your job is for your old 401k funds to be placed into an IRA. One of the major benefits is you will not need approval from your employer when deciding where, when, and how to invest your funds.
It includes selecting which funds you want to invest in. There is also no waiting period for contributing. You can put as much as $6,000 (the maximum annual contribution for this type of account) into your account on the day you first open it if you want to.
Finally, typically IRAs have much lower fees compared to workplace plans, which over the years saves you a lot of money.
Related Articles:
How To Avoid Taxation When Transferring Your 401k
Can You Buy Gold with Your Fidelity 401k?
Differences Between a Roth IRA and a Traditional IRA
There are two major options available when selecting an IRA: a Roth IRA and a traditional IRA. The major difference between the two involves taxes. With traditional IRAs, the money placed into your account is not taxed until it is withdrawn. So you don't have to pay any taxes now.
On the other hand, with a Roth IRA, your investment is taxable now. However, when the money is withdrawn, you will not have to pay any taxes. That can be good if in the future the tax rate increases.
How to Get Your New IRA Set Up
It is easy to set up an IRA and shouldn't take too much time. First, you should review the different accounts that are available.
The most important things to look at are management, commission, and transaction fees since they can vary a lot among providers.
After you find the right account for you, your next step is to fill out the paperwork. It will require your contact information and personal details.
After opening your account, contact your former employer and ask them to initiate the transfer of your old 401k into your IRA. Do not get your funds in the form of a check since that may count as cashing out your money.
The next thing you will need to do is choose the best investments for you. A combination of ETFs, index funds, and more can be created to meet your requirements. Your money should now be settled into its new home.
How to Find the Best Fit for Your Old 401k
It is exciting to start a new job. However, make sure all of the loose ends are tied up with your old 401k. When you make the right decision, you will be able to get your retirement fund secured and maximize your wealth.
It would be great to enjoy an early retirement due to planning.
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I started BMOGAM Viewpoints as a way to compile all my views on investing in one place. I own my home, have some real estate, and own a few stocks like most people, but what really drives my interest in investing is I have a strong love of precious metals, especially gold.
