What to do (and not do) with your old 401(k)

During a working career, the average worker changes jobs about 11 times. That’s a lot of old 401(k) accounts! If you’re switching jobs, or have some old 401(k)s floating around, you technically have four options – though at Simply Money Advisors, we only think three are viable.

Leave your money in your old 401(k) plan: In most cases, if your balance is more than $5,000 your former employer will let you keep your money right where it is. In the short term, that could be the best decision – it’s one less thing to worry about as you’re getting adjusted to your new job. You can always move it in the future. However, in this scenario, realize that you can no longer contribute to it, and if you choose this option too often you could have a lot of old 401(k)s scattered about.

Transfer your money into your new employer’s 401(k) plan: This option may make sense if your new plan has excellent investment choices.

Rollover your money to a IRA: This is called a “rollover” because you’re taking one tax-deferred account (your 401(k)) and rolling it into another account with the same tax structure (your Individual Retirement Account). This option gives you more control over your money because it’s now “self-directed.” An IRA rollover will likely be more costly, so it is important to determine if any benefits are worth the cost. Also realize that this is the only option some financial advisors will mention because it’s the only option in which they get paid for working with you.

Cash out: Unfortunately, 40% of you take this option, especially younger workers in the early stages of their career. Cashing out means you’re paying taxes and potential penalties to the government, and you’re also losing out on all the growth and compounding potential. Remember, Uncle Sam’s favorite option should be your least favorite option. Don’t cash out.

The Simply Money Point

There is no, one absolute rule for what to do with an old 401(k). Find a financial planner who will actually take the time to work with you and figure out the best strategy for you and your particular situation.

Is this something you need help with? We invite you to speak with our team.

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