“What do I do with an old 401k?” One of the most common questions we come across as financial planners. While your situation will be unique, in this video and blog we will cover the three major options to evaluate:
- Do nothing
Setting the Stage
There are three main options that you’re typically evaluating in order to answer the question, “what do to do with an old 401k”? I suspect you’re likely going to wonder why you haven’t heard about one of the option more. In fact, it’s actually going to be the option that I typically recommend to most clients.
Option 1: Do Nothing
You’ve just left your old employer, and left behind is that old 401(k) plan. What comes next?
You should know, your first option may surprise you. You technically don’t have to do anything. Although, I’ll point out why you probably should.
Typically, if your account value is under $5,000, the record keeping and expenses involved with keeping your account will be too high to cover the cost of keeping you, so the plan will force you out. At that point, you’ll have to decide between one of the other options. It’s worth knowing though that if you have more than $5,000 in your account, you can likely just leave your account where it is.
Why leaving your account is often the least optimal decision:
The 401(k) plan is at the discretion of your employer, meaning they choose which institution to use, and they also choose the investment menu of which you can select from. Suffice to say, you are at their mercy.
They might change which institution holds the account and which investment options you can pick from at any time. None of which needs to be reviewed with you. It is common for people who have left their accounts behind to lose track of the account years down the road when they haven’t been keeping up with it.
You can quickly see how someone in this situation can easily fall off track with their planning.
Option 2: Rollover from Your Old 401(k) to an IRA
Whether you’ve done one before or seen a major financial company’s marketing, a rollover is a very common option for your old 401(k) plan. A rollover involves moving funds from that old 401k into an Individual Retirement Account (IRA).
Individual Retirement Account (IRA)
As the name implies, is a retirement account specific to you, meaning you’re in control. You can choose which institution to open the account with. You can also choose the various investment options that are available, which nowadays are virtually limitless. We could argue this may be a pro or a con, as we are often our own worst enemy when it comes to investing. For many, the simple menu of the 401(k) may in fact be best. But, the wider range of investment options are usually cited as one of the major reasons people choose the rollover.
Rolling your money into the IRA also provides the opportunity to work with a financial planner or investment manager. Access to this advice is another common reason many people end up choosing this path and should not be overlooked. This happens because many advisors charge their fee based on the assets that they are managing. A 1% management fee is fairly common in our industry. This means the advisor manages the rollover IRA and charges a fee against the account for compensation.
One downside to this model is it often causes option three to be overlooked, and option three is often my favorite.
Option 3: Roll-In to a New 401(k)
The roll-in involves moving your money from the old 401(k) plan into your new 401(k) plan. Unfortunately, not all plans allow for roll-ins, so your first action item is to check with your HR department and find out if it is even possible.
If it is, this becomes a great option to consider especially for you high income earners. As far as the logistics, very little will change from your previous situation as you are simply going from the old plan to the new plan. The same rules apply. The employer decides where the plan is held and the available investment menu.
Why then is this often my favorite option?
The attraction of the roll-in comes from the roll-in’s ability to allow for clean backdoor Roth contributions.
Now going into backdoor Roth contributions is outside of the scope of this video and article, but you can read more about the Back Door Roth IRA process here.
As you can imagine, which scenario will ultimately be best for you depends on your unique financial situation. If you have an old retirement plan and you aren’t sure if it is most effectively working for you, please contact us to schedule an initial consultation.
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