New job? New 401(k).
After my first few jobs, I felt like I was collecting 401(k) accounts.
I had no idea where the accounts were, how much was in them, or how I had invested the money.
Most folks I know tend to switch jobs every 2-3 years. After a full career, that’s 20 different 401(k) accounts.
No wonder people give up trying to track this stuff.
Luckily, there’s a way to simplify all this. By rolling your old 401(k)s into a new account, you can keep your money, avoid taxes, and get rid of the old account entirely.
It’s a good habit to do whenever you leave a job. That gives you one account to manage instead of 20.
You’ve got two options on how to handle this:
In this article, we’re going to do a deep dive into how to roll your old 401(k) into your personal IRA.
After leaving a job, you have multiple options to move the money in your 401(k) account to another type of protected retirement account, called rolling over the account.
You don’t have to roll the money into a new retirement account, but it is the smartest choice when you want to continue saving for the future without suffering multiple penalties.
The majority of people will choose to roll over the 401(k) funds into an IRA, or individual retirement account. From a tax benefit standpoint, the IRA works in a similar manner to the 401(k), minus the contribution from your employer, of course. And since it’s a personal IRA, you have full control of the account and investments.
Moving your 401(k) account funds into an IRA is easy and efficient. Here are the seven best reasons to move your retirement funds from your old employer’s 401(k) to an IRA.
Follow these steps when doing a 401(k) rollover to an IRA.
Any brokerage or bank should have an IRA option you can use. In general, stick with an investment bank that you’re already using.
If this is your first personal investment account, Vanguard, Charles Scwab, Fidelity, and TD Ameritrade are all good options.
Go to their site and find the option for opening an IRA. It typically takes 15-20 minutes.
After opening the IRA, you should receive instructions for rolling over your 401(k) balance into the IRA. If not, they usually have a guide in the support section of their site.
You may need to contact the 401(k) plan administrator at your old employer, or the institution that contains your IRA may be able to take this step for you. Some 401(k) plans will hand you a distribution check that you must deposit yourself into the IRA, while some will allow an electronic transfer to the IRA.
If at all possible, have them transfer the money for you. If the money isn’t transferred in time, you could be forced to pay taxes on it. Have the banks worry about this stuff.
When the money hits your new IRA account, it’ll likely stay in cash. It won’t be invested automatically.
Remember to log into your new IRA and invest that cash. Over time, cash loses its value to inflation. You also miss out on the investment gains that you could have had.
I use rollovers as a chance to rebalance my portfolio. If my asset allocation is out of alignment, I’ll make new investments to get back on target. The lazy portfolios are an excellent place to start.
If that sounds too complicated, find a target date fund and put all your money there.
Here are four final things to think about before you do a 401(k) rollover to an IRA.
You do have other options beyond rolling over the money into an IRA. Some of these options may work better for your particular situation.
If your employer’s 401(k) plan administrator allows former employees to keep their 401(k) money in the plan, you can choose to do nothing. This isn’t always the case, as some plans require former employees to move the money out of the plan within a certain time frame after the final day on the job.
If you have a certain amount in your 401(k) account, usually at least $5,000, your former employer may allow you to keep the money where it is. This is beneficial to the plan administrator, as the plan’s overall balance remains higher. It also generates less paperwork for the administrator.
Keeping the money where it is can be a benefit to you, especially if you will not be jumping directly into a new job, or if your new employer doesn’t offer retirement benefits.
The downside is the plan could make significant changes to the investment options it offers, and you may not receive immediate notification, which may leave your money in a bad investment. And if your old employer goes into bankruptcy or is sold to another company, your 401(k) money could become inaccessible for a few months to a couple of years.
You have the option of sending the entire balance to your new employer’s 401(k) plan. For some, having all of the retirement money in one account is the easiest option to manage.
If you have the ability to borrow against your 401(k) balance for things like home purchases, moving your old employer’s 401(k) account into your new employer’s 401(k) account is a beneficial idea. Having a higher balance in a single 401(k) account is a benefit versus having your retirement money spread across a few accounts with smaller balances in each one.
When getting a new job with a great 401(k) plan, this is an excellent option.
You’ll rarely see anyone recommend that you take the cash out of your old 401(k) account when you switch jobs. The penalties and tax hit you will have make this a poor financial choice for most people.
You may have to pay a 10% penalty to the IRS on the entire balance, and you may have to pay taxes on the balance at your current income tax rate. The IRS may waive the penalties if you have excessive medical costs that you need to pay or if you have a disability.
If you are not working after you leave one job, meaning you will have a low income tax rate, and you need the money to function, you may be able to justify the hit when cashing out your 401(k). But it just isn’t a good idea except under extreme circumstances.
401(k) Rollovers: Everything You Should Know is a post from: I Will Teach You To Be Rich.