What to Do with Your Old 401(k)

In today’s job market – the average worker between the age of 18 and 48 has held eleven jobs. And with all of those jobs, typically comes multiple retirement accounts. So, what’s a person to do with all of those old retirement accounts when they move to a different company?

This is probably one of the most frequently asked questions that I hear. People are told over and over to contribute to their workplace retirement plan, but they rarely hear advice telling them what they should do with the retirement account when they leave that job. Should they ignore it, move it somewhere else or take the money out to pay off debts? Fortunately, you do have options.

The following recording is from “Mornings with Kelli and Steve” on Moody Radio Indiana (97.9 FM).  For more information on Moody Radio, go to moodyradio.org/indiana.

Let’s start with a basic question.  What if I have bills to pay and need the money?  Is cashing out my account a good option?

Cashing out your account balance is always an option, however, it can have some pretty big consequences.  First off, unless you’re now retired, you’ll be using some of your retirement savings for another purpose and have less money saved when you do eventually retire.  The other issue is that in most cases you will need to pay taxes on the amount you take out as well as a 10% penalty on your distribution if you’re under age 59 ½, which makes this expensive money to use for things like paying off credit card debt, etc.  Make sure you exhaust your cheaper options first.

What if I have an outstanding loan when I leave my job?

One of the risks of taking out a loan from your employer plan is the possibility that you will leave that job before you get the loan paid off.  As long as you’re working for the company, you can take up to 5 years to pay it back.  However, once you leave the job, those rules change.  Until recently, you only had 60 days to pay it back, but under new tax rules, you have until the due date of your federal tax return, including extensions to pay it back.

If you don’t pay it back in that timeframe, any unpaid balance will be considered an early distribution and you will need to pay income taxes and possibly the 10% early withdrawal penalty too.

If I want to keep the money in a retirement plan, can I just leave my account where it is and not worry about it?

You will need to check with your employer to see if leaving the money in the current plan is an option.  It will depend on the specifics of that plan.  For example, many employer plans will force accounts with less than $5,000 to be moved out to reduce administrative headaches.

If you have the option of leaving it in the plan, there are some pros and cons to consider:

Pros

• It’s convenient to not move the account.
• In some states, there is more creditor protection inside a workplace plan than in other retirement plans.
• You may like the investment options offered in that plan and you can’t buy them on your own.
• It could give you some time to figure out what to do or what your options will be with a new employer.

Cons

• You will be limited to the investment options offered in that plan.
• There could be additional fees in the employer plan. Typically, the smaller the employer, the more expensive the plan.
• Having old plans from multiple employers can get confusing over time.

What if I want to keep the money invested for retirement, but don’t like the idea of leaving it where it is?

Now that you’re no longer employed by the company, you have a lot more freedom regarding what you can do with your retirement savings.

1. Transfer it to your new employer’s plan – If you have started working for a new employer that offers a retirement plan, you can usually move your old accounts into the new one. This allows you to consolidate the old with the new so you still only have one account.  There are no taxes or penalties with this type of transfer.  I would suggest researching the fees in the new account to make sure they’re not too high and also make sure you like the investment options being offered.
2. Roll it into an IRA – You have the option to move the money to an Individual Retirement Account through a process called a rollover. You are simply moving the retirement savings from the employer plan to an account that you now control and it can be done without tax consequences.  An IRA is a very common tool that gives you control over where it is held and how it is invested.  If you want to put it in your bank, you can do that.  If you want to use it to invest in mutual funds or individual stocks, that’s a possibility too.  You can either do it yourself or hire an advisor to help you with it.  If you are considering using an IRA, you’ll also want to understand any fees being charged for the account or the services being provided by the investment company or an advisor because they can be very different.

Brad Graber, CFP® has been working with clients on personal financial planning and investment issues since 1996. He invests his time mentoring and educating individuals on ways to be better stewards of the resources God has entrusted to them.