401(k)s are one of the best benefits and employer retirement savings plans in the professional world. They make saving money convenient and are a vital part of many people’s retirement planning.
However, with the average American holding more than 12 jobs before the age of 52, you’re unlikely to have just one 401(k) during your career — and that can leave you unsure of what to do.
In order to make good choices with older 401(k)s, you first need to understand that every dollar you put into a 401(k) is your money. The plan may be attached to an employer, but they cannot remove or interfere with any money you’ve contributed. Some employers make matching contributions that they are allowed to take back if you leave your job before being fully vested (i.e., you weren’t at the company long enough), but your contributions belong solely to you.
So, what should you do with the money that’s sitting in an old 401(k)? There are several options:
Roll it Over
For many people, moving the money from an old 401(k) to a new investment account is the best choice because it gives you more control over your money and limits the number of accounts you have to manage. If you want to roll over a 401(k), there are two options that allow you to avoid any taxes or penalties.
First, you can simply roll an old 401(k) into the one attached to your current employer. Not all employers permit this but, if yours does, the process is fairly simple and your employer may even help you out. Just make sure you opt for a direct rollover. The money should move from one 401(k) to the other without passing through you.
Your second option is to roll the money into an IRA. This is also a simple process. You’ll choose a financial provider, open a rollover IRA, and ask your old 401(k) for a direct rollover.
So, which choice is right for you? That depends. If you really like the investment options provided by your new employer and want to manage as few accounts as possible, rolling an old 401(k) into a new one makes a lot of sense. However, if you prefer the wider range of investment options offered by most IRAs and don’t want to end up with yet another old 401(k) should you leave your current job, you’ll likely be happier moving your money into an IRA.
One thing to remember is that, while you can take a loan out of a 401(k), you can’t take a loan from most IRAs. So, if you think you may need to borrow from your retirement savings, keeping your money in a 401(k) will offer more options.
You don’t have to do anything with an old 401(k) if you don’t want to. You can let the money sit there until you reach 70½, at which point you must start taking annual required minimum distributions.
The problem with not doing anything is that you’ll have little to no control. You won’t be able to add money to the plan and, if you need to withdraw from it, your options could be limited. It’s also difficult to manage the investment strategies of multiple 401(k)s, particularly when you no longer have regular, employer-granted opportunities to adjust your plan.
That said, keeping the money in an old 401(k) is far preferable to cashing out. By doing nothing, your money can still grow tax-deferred and will be available for your retirement.
Donate to Charity
If you don’t think you’ll need the money in a 401(k), you can withdraw it, pay the taxes and penalties, and give the money to charity. However, if you want to maximize the gift, you should include the donation in an estate plan. By donating your 401(k) upon your death, the money will transfer tax-free, providing the charity with more funds overall.
Try Not to Cash Out
You always retain the right to convert money that’s in a 401(k) into cash. However, it’s a poor strategy unless you’re of retirement age or need the money for an emergency and have no other options.
The problem with withdrawing early from a 401(k) is that you’ll have to pay income taxes on the entire amount you withdraw and you’ll likely face an early withdrawal penalty of as much as 10%. If you’re 59½ years old, you can avoid the penalty, but you’ll still owe the taxes immediately. Of all the ways to handle a 401(k), cashing out is the worst financial option.
How you handle an old 401(k) is up to you and your personal needs and preferences. The important thing is that you make your decision based on good information. Your retirement is too important to ignore.
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