What To Do With Old 401K

This is going to be a short email.

I think more people realize that staying at one job reduces their potential to increase their salary limits. That is because most people often only receive a 2-3% raise every year.

However, sometimes this salary raise does not even keep up with inflation. This means that you are getting paid less to do the same work at your job.

This led to more people realizing that switching employers every couple of years allows them to get that 15-25% salary bump. So, more people have started to do just that in recent years.

If you are one of those people or are considering leaving your current employer in the near future, you will soon want to know what to do with the 401K account that you currently have with your employer.

Here are the four options available to you in regards to your old 401K account once you switch jobs.

Cash It Out

This is by far the worst option. The reason being is that you automatically have to pay a 10% penalty since you are taking out your money before the age of 59.5.

In addition, since you still have not paid any taxes on the money you contributed to your 401K, then you are subject to paying taxes on the full withdrawal amount.

I personally think that between the penalty and the taxes you have to pay, cashing out your 401K should be your last resort.

Leave it with Old Employer

The option most people opt for is leaving it with the old employer because they do not know what to do with it. If you have a 401K with Vanguard, Fidelity, or Schwab then you are most likely going to be fine. However, it all depends on the funds within your account.

Make sure your funds are low-cost index funds so you are avoiding the high fees.

However, leaving it with an old employer may not be the best option in case that employer ends up going out of business. This is not unlikely. Many successful businesses have gone out of business.

You do not want to be stuck in that situation where you are chasing an HR department that no longer exists (you need an HR representative to switch over your 401K).

Rollover to New Employer

The next option, and probably best for the majority of people, is to roll it over to your new 401K with your new employer.

This is only good if your new 401k plan has better investment funds that are low-cost. If this is not the case, then it makes no difference.

The rollover process is pretty simple and seamless. You just contact the old employer’s HR department and give them your current HR info and tell them you would like to roll over your 401K. They will handle the rest.

Rollover to IRA

Lastly, you can roll over your 401K into an IRA. There are advantages and disadvantages to this option.

An IRA is an individual retirement account. This means that you are solely responsible for what happens in this account. You choose what funds, stocks, or bonds to invest in.

This is the flexibility you gain with an IRA. You are no longer limited to the options provided by your 401K account.

However, you are also responsible for contributing to this account on your own. The money will no longer come out of your paycheck automatically. You must also ensure that your money is invested in low-cost funds.

Have a wonderful week!

Muhamed