New job? What to do with your old 401(k)
By Maryalene LaPonsie/MoneyTalksNews
They're called orphans. They're the sad, lonely 401(k)s that workers leave behind when they change jobs.
What should you do if you have one? Well, you have four choices:
- You could leave it with your old employer.
- You could roll it into a 401(k) at your new employer.
- You could roll it into an IRA of your choosing.
- You could cash it out.
Now, forget we ever mentioned No. 4 because it is not just a bad idea, it's a very, very bad idea. Cashing out your 401(k) has the potential to put you back at square one for retirement savings. What's more, you'll pay a 10 percent penalty on that money plus income taxes if you're younger than 59 1/2. Trust us, that's not going to look pretty come April 15.
Instead, you should consider what type of retirement fund you want to hold your money. There's nothing wrong with keeping your cash in a 401(k), but might we suggest an IRA could be a better choice?
Click ahead for a look at five reasons why you should consider rolling over your old 401(k) account into an IRA.
Reason 1: You could be paying outrageous fees
Maybe your old 401(k) plan is awesome, but it could also nickel-and-dime your nest egg with all sorts of fees. (You can get up to speed on the subject with our primer on 401(k) fees.)
Before leaving your retirement money with a former employer, take a close look at how much you're paying for the plan. Then, compare that to what's available through an IRA. If the IRA is cheaper, then your decision to roll over should be easy.
Reason 2: An IRA may give you more options and control
Even if the fees are reasonable, your orphaned 401(k) may come with limited plan options. By rolling the balance into an IRA, you get the luxury of shopping around for the funds that will best meet your savings needs.
What's more, in the event your 401(k)'s current investment option is discontinued, a former employer may take it upon themselves to choose where your money will be reinvested. You will be notified of the change, but if you move and forget to update your account information, you may never know.
Reason 3: Our memories are not always reliable
Speaking of forgetting, orphaned 401(k)s lend themselves well to being out of sight and out of mind. ING Direct found 11 percent of those with orphaned 401(k)s had no idea how much money was in the account. Can you imagine?
But let's take that idea a little further and consider what happens after you've gone through four or five jobs. It's not inconceivable that 20 years down the line, you could completely forget you even had a 401(k) at one of those jobs.
Finally, you want to make sure your investment is actively managed and periodically rebalanced. A 20-year-old orphaned 401(k) might still be invested in funds that are more appropriate for a 30-year-old than a 50-year-old. Moving money to an IRA may help you remember to re-evaluate risk and reallocate balances as you age.
Reason 4: Your old employer is unstable
Fortunately, federal law prevents a company from dissolving and taking your 401(k) money with it. However, if your former employer does go belly up, it could end up being a pain to access your retirement funds.
A bigger concern would be if your retirement money was heavily invested in the company's stock. In that case, your 401(k) balance could drop through the floor should the business head to bankruptcy court.
Reason 5: It will make your life easier
Perhaps the most important reason to find a new home for your old 401(k) is that it will simplify your life. You won't have to review plan options for a handful of accounts. You won't have to update your beneficiary and account information with multiple companies. You won't need to remember where the money is and how to access it.
Having a single IRA for all your money can give you a more complete picture of how close you are to your retirement goal. It can also free up head space and reduce the paper clutter that comes from trying to manage multiple accounts.
There may be good reasons to consider keeping your money at an old employer, but that decision shouldn't be made blindly. Decide whether these reasons apply to your situation and if so, talk to a trusted financial professional about the rollover process.