If you have an old 401K account from previous employment and are confused about what to do with it, you have a few options.
You can leave the money by itself, transfer it to a new employer’s plan, or roll it over into an Individual Retirement Account (IRA) and withdraw the cash value and pay the taxes and penalties.
Access to a broader range of investments, such as individual stocks, a larger selection of mutual funds, and greater control over account costs, including plan administration fees, are all reasons to shift your money to an IRA or roll it into your existing employer’s plan.
In this article, we’ll discuss these options in detail and provide some tips on what to consider when deciding What To do With Your Old 401K account.
What is a 401K Rollover?
You may be wondering what a 401K rollover is. Continue reading as we go over everything you need to know.
A 401K rollover is when you direct the transfer of money from your 401K plan to a new 401(k) plan or IRA. The IRS allows you 60 days from the date you receive an IRA or retirement plan dividend to roll it over to another plan or IRA.
When you move jobs or retire, you probably have four options for what to do with old 401K Account. Most of these actions will be the same whether you have a 401K, Profit Sharing Plan, Cash Balance Pension Plan, 403(b), or 457 retirement plan.
Option 1: Leave the money in your old employer’s 401(k) Plan.
Option 2: Transfer the funds to a new retirement account at your new workplace. This assumes they accept incoming transactions.
Option 3: Convert your 401(k) to an Individual Retirement Account (IRA).
Option 4: Calculate the cash worth of your account. You must pay the taxes and penalties.
You can browse the top IRA rollover companies here.
What To Do With Old 401K?
Here are a few options in detail for What To Do With Old 401K:
1. Keep Your Old 401K Where It Is
The most basic option is to do nothing. Most plans enable you to leave the money aside if your balance is greater than a particular amount, which is often $5,000 but varies per plan. While retaining it in an old workplace plan may appear to be a sign of sloth, there may be advantages to doing so.
Keeping your old 401(k) as is might give you a peace of mind but it’s certainly not the most optimal option for many investors.
To begin with, your money will remain invested and have the potential to grow, and any growth will be tax-deferred. Furthermore, you may find that the plan’s investing menu or any other features you use, such as automated guidance, are better than if you moved the account.
To determine whether it makes sense to keep your money where it is, you should analyze your current plan features and compare them to those in other accounts.
Another advantage of remaining in-plan is that most 401Ks allow you to borrow against them, i.e. take out a loan from them. While it is not ideal to withdraw from your retirement funds, it is not necessarily a negative alternative if you are in need of money. Taking a loan from a 401K is not a taxable event, but keep in mind that the loan is done using after-tax funds.
If you fail to repay your loan, it becomes a taxable event and is taxed similarly to a retirement distribution – with a penalty if you are under the age of 59. Loans from a 401K normally have low-interest rates, and the money you pay back goes into your account rather than to the lender (because you’re essentially your own lender).
This form of loan also does not require a credit check, so it will not appear on your credit report or affect your credit score. Before taking a loan from your 401K, be sure you understand your plan’s loan regulations and the potential tax implications.
If you’ve moved jobs several times or simply like to keep all of your money in one place, consolidating your retirement assets into one or as few accounts as possible is sometimes worth the peace of mind.
2. Transfer to Your New Employer’s Plan
While keeping your plan in place is easy and, in some situations, a profitable option, it may make things easier in the long run if you consolidate your old 401K accounts by rolling them into your current one, assuming the plan allows. You’ll have fewer portfolios to handle at fewer institutions.
The other benefits of this option overlap with the help of keeping your money in an old plan (most notably, your savings can remain invested, grow tax-deferred, and borrow from them). If your new plan permits you to roll over savings from another company account (most do), you may be able to do so.
A direct rollover transfers your money immediately from your old plan to your new one, so you never have it in your hands. With an indirect rollover, you withdraw your savings from your previous plan and receive a cheque, and you are responsible for re-investing the funds in your new plan on your own.
The obstacle is that because the money is going into your hands, the IRS will deduct 20% of the amount for income taxes. However, if you transfer the whole amount of your rollover money into your new plan within 60 days, you will be repaid what they withheld when you file your taxes.
For example, if you’re making an indirect rollover of $10,000 and the IRS withholds 20%, you’ll need to find the $2,000 they withdrew from your own money to contribute to your new plan in order to complete the $10,000 rollover. When you do, you will receive a $2,000 refund when you file your taxes. As a result, indirect rollovers are less common and more involved than direct rollovers, requiring more work and responsibility on your part.
3. Transfer funds to an Individual Retirement Account (IRA).
If you don’t want to rollover an old plan into your new employer’s plan (or don’t have a new plan to rollover into), but you also don’t want to leave your money in your old plan, you should consider opening a rollover Individual Retirement Account (IRA).
This can be done at any institution of your choice, and like switching to a new employer plan, it can be done directly or indirectly. Moving your funds to an IRA, like consolidating your accounts in your new employer plan, allows you to remain invested and allow your money to grow tax-free.
Your investment options and cost structures may range greatly depending on the business and account type you choose to rollover into for your new IRA. For example, while you may have access to a broader selection of investments in your new IRA, such as individual stocks and ETFs, you may not have access to potentially cheaper share classes as you had in your previous plan.
You should also compare the characteristics of the IRA to your prior 401K, such as investment advice or access to online trading skills, if such things are significant to you.
Personally, I recommend performing a gold IRA rollover. That way, you can invest in precious metals while availing the tax advantages of an IRA.
With a precious metals IRA, you’ll be able to add physical gold and silver to your retirement portfolio. That’s a powerful advantage which you wouldn’t get with other options.
4. Cash Out
The final option is to just withdraw the funds in cash and close the account. But don’t be fooled by the word “simply.” This is not a good option unless you are 59 or older. If you are 59 or younger, you will be charged a 10% early withdrawal penalty fee, and regardless of your age, you will be required to pay income taxes on the entire amount removed.
You can even end up in a higher tax bracket for the extra income that year. Cashing out is a pricey solution that should only be taken in emergencies. Before choosing this choice, you should always consult with a specialist and ensure that you completely understand the implications.
Things to Consider When Wondering What To Do With Old 401K:
When deciding on What To Do With Old 401K, consider the following points and make sure you’ve done the necessary research.
Do some research on fees before deciding whether to stay in your former employer’s plan or to rollover into a new employer plan or an IRA. Consider the costs of the investments available in an account, as well as trading charges and any account fees (some may charge a quarterly or annual fee).
Investment breadth and quality:
Fees are only one factor to consider when deciding on an investment strategy. If you consider yourself a fairly knowledgeable investor, you can compare your new employer’s investment menu to your previous one, or if you are considering an IRA, pay attention to the various investment vehicles they offer. If you’re new to investing, seek advice from an expert.
Services and Account Features:
Different accounts may have different features and offerings. For example, many 401K plans will include free or fee-based advice services. If you prefer a hands-off approach to investing, seek a managed account solution, which is occasionally available in several programs.
While it’s usually not a good idea to withdraw from your retirement savings, life happens, and your options for accessing your money, as well as any penalties, may vary between accounts. Pay heed to the withdrawal rules in case you ever need cash.
It is critical to understand the tax consequences of the various options for What To Do With Old 401K. If you choose to cash out, for example, you may end yourself with a higher tax rate for the year and have to pay much more in income taxes.
Understanding your alternatives, including the potential benefits and drawbacks of each, will allow you to make an informed decision about what to do with any old 401(k) plans you may still have.
If you need help deciding which option is right for you, the financial planners can assist you and keep you on track to meet your retirement savings objectives. They can also help you with a rollover if you want to open an account with John Hancock. Take control of your future by doing your research and making an informed decision that is best for you.
Choosing what to do with an old 401K can be difficult. It is critical to balance the benefits and drawbacks of each choice, as well as examine aspects such as costs, investment possibilities, and your specific financial goals.
However, I personally suggest investing a portion of your old 401k into a gold IRA. That way, you can be certain that inflation won’t eat away all your savings. Precious metals have historically other investments when it comes to retaining value during economic downturn.
Browse my top recommendations here.
Finally, the best option for you will be based on your own circumstances. You can make an informed decision that will help you achieve your retirement savings objectives if you take the time to investigate your alternatives and conduct research.