Consolidate your retirement accounts
If you’ve been in the working world for a while and bounced from one employer to another, you will likely have multiple employer sponsored retirement accounts (401k, 403b, etc.) floating around. This can begin to feel overwhelming when you have 3, 4, 5, or even 6 accounts spread across several different employers…and honestly, it can be easy to forget about them over time.
When you leave an employer you have several options on how to manage your retirement savings. Some options make more financial sense but it’s up to you to see what works best for you. If you are juggling multiple account here are your options:
Leave it where it is
This is the easiest option in the short term because it requires no work on your end. While it is the easiest option, it does have some drawbacks. Since you are no longer an employee plan participant you may miss out on important plan changes and you will no longer be allowed to make contributions to the account. Also, you are limited to the investment options within that account…and 401k’s usually have a fairly limited selection of investment options. Finally, one of the biggest drawbacks in my mind is that by leaving the account where it is means one more account to keep track of.
There are no tax implications with this option since you are keeping the money in the account. As long as you leave it in there until you are 59 1/2, there will be no penalties.
Note: If you have less than $5,000 in the account the plan may force you to move the money.
Rollover to your new 401k
If your new employer has a 401k plan and accepts transfers, you can consolidate your old plan with your new one and manage it from there. Keep in mind, not all plans will accept transfers so you will want to confirm with your new employer on the rules.
Similar to the last option, you may have limited investment options in your new 401k.
I do like this option because it helps consolidate your accounts. Downside, limited options.
Establish a rollover IRA (or use your existing IRA)
You can set up a new IRA (Individual Retirement Account) or use an existing account if you have one, and perform a direct or indirect rollover to that account. Not to get too in the weeds, but a direct rollover will send the money directly to your IRA, while an indirect rollover will send the money to you and then you have no more than 60 days to deposit the money in the appropriate retirement account - taxes and penalties apply if you don’t deposit the money in time. To make things easy, go with the direct rollover.
I really like this option because it keeps all of your retirement money in one place and you won’t be scrambling to find a 30 year old account when you’re preparing to retire. If you have a Roth 401k, you can use your Roth IRA in the same way.
This option will also offer significantly more investment options.
Cash out
I hesitated including this option because the tax and penalty implications, not to mention diluting your growth opportunity in the account. But I wanted to give you all your options. If you cash out the account you will pay income tax on the full amount plus a 10% penalty for early withdrawal. PLEASE think long and hard before choosing this option.
Like everything else in personal finance: understand your options, figure out what makes sense for you and your goals, make a plan, and move forward.
If you have any questions on how to make these decisions let me know. I would love to help.