Have you ever left a job and wondered what would happen with your 401k account? No worries! You’re not going to lose your money. There are five options available to you when you have a 401k option with a former employer.
Option 1: Leave the money where it is.
You do have the option to leave the money where it is. The upside is you are most likely already familiar with the company. But there’s always the possibility that your money might move over time. The company that is holding your 401k account could change. Your former employer might choose a different company and the money could move. As the years pass, paperwork can get lost and you may find yourself having to look for your 401k account. In the past, I have had client who could not find their account. Depending on your age and retirement plan, this may not be the best option for you.
Option 2: You can withdraw the money, but there’s a penalty.
Your retirement money should be for retirement. Most likely you are looking for another job or already have one. Withdrawing the money is not the best longterm solution. You’re going to lose out on that money in the future. Plus, there’s a 10% penalty and, if you’re younger than 59 and a half, you’re going to pay the taxes. If you had $10,000 saved, you’ll likely end up with $6,000-7,000. Even in an emergency, this is not the best place to get money.
Option 3: You can move the money to an IRA.
Moving 401k money to an IRA is a qualified transfer. Both accounts collect pre-tax money. You can avoid the penalty and out-of-pocket taxes through the direct transfer. If you’ve had a lot of jobs over the last decade or two and a lot of old accounts, an IRA could be a very good option for you. It will allow you to consolidate your money.
There are a few ways you can set this up. First, you can meet with a Financial Advisor licensed to sell securities. I recommend asking around and finding someone that you like and trust. They will work with you to understand what is going to happen with your money and how it will be invested.
It’s important to get some guidance. They will charge you. Generally, they work on commission, but it’s worth it. If picking out stocks and bonds isn’t exactly your jam and you don’t know what you’re doing, that money is well spent.
If you’re someone who loves the market and want to place your own trades, you can open an IRA with a discount brokerage firm. They have much lower fees, but you are going to be doing the work when it comes to growing the money in your IRA.
Option 4: Transfer your old 401k to your new 401k.
This option isn’t always available. There are certain rules and restrictions that vary from account to account. Some accounts have restrictions against these types of transfers. You would have to ask HR if they can find out if this type of transfer is allowed. You would have to contact your old 401k company and see if they would allow it as well. If it is allowed, that’s fantastic! This transfer is a non-taxable event. You’d be moving qualified money to a qualified account. This consolidates your money and allows it to be managed by a broker.
Option 5: Convert your 401k into a Roth IRA.
This is a taxable event. And what makes this even more difficult is that you must pay those taxes out-of-pocket. This is generally not the best solution, but a financial advisor may make this suggestion to you. If you have a few thousand dollars in your 401k, this may be a better option. There are a lot of advantages to having Roth money in retirement. You want to make this decision under the guidance of a financial advisor and your tax accountant.
I hope you find this information beneficial. If you have any questions, feel free to leave me a comment below.
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