Options for rolling over an old 401(k)

What To Do With An Old 401(k) When You Change Jobs

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Think about the last time you started a new job. It was an exciting time, right? A new job is an opportunity to start fresh. It's the time to enter a new office, hone new skills, brew new coffee, greet new coworkers, and most importantly, open a new retirement plan. Many of us have started a new career and wondered what to do with the 401(k) from our last job. We worked hard to save and don't want to sacrifice it with an avoidable mistake. Here are three things you can do with your old 401(k) to keep your savings safe—and one thing to avoid.

Option 1: Do nothing. Keep your old 401(k) right where it is.

I'll start with the easiest option. If you're happy with your former employer's 401(k) plan, then you don't need to touch it. This assumes you meet the minimum balance requirement, which is often $5,000. Even though you aren't contributing anymore, your account will continue to grow tax-deferred through compound interest. If you also have a 401(k) with your new employer, you'll have to keep track of both accounts. However, this shouldn't be an issue if you use an app like Personal Capital to monitor everything in one place.

Option 2: Rollover your old 401(k) into your new 401(k).

If your new employer offers a 401(k), you can transfer your old account into the new one, if permitted (it usually is). This is an easy process that you can complete online. The benefit to consolidating accounts is simplicity. But before making a decision, you should compare the fees and investment offerings of both plans. If your old employer's plan is favorable, you may want to keep it there.

Option 3: Rollover your old 401(k) into a traditional IRA.

This is what I did with my old 401(k). Many people dismiss this option because it sounds complicated. But I promise, it's not. First things first, what's the benefit of an IRA over a 401(k)? Well, a 401(k) has limited investment options that your employer preselects. These choices usually carry high fees, which eat into your savings. On the other hand, IRAs offer a broad range of investment options. Plus, an IRA gives you the flexibility to take penalty-free distributions before age 59 1/2 for first-time home purchases and qualifying higher education expenses.

You can roll your old 401(k) into an IRA with most brokerage firms, whether you choose an online platform like Wealthfront or something traditional like Fidelity, Charles Schwab, or Vanguard. Personally, I have zero desire to pick individual stocks or index funds. That's why I rolled my old 401(k) into an IRA with Wealthfront. Wealthfront invests my money in index funds that align with my risk strategy, and I don't have to touch a thing. Whichever brokerage you choose, follow their guidelines so that the money rolls directly from your 401(k) into the new IRA.

What NOT to do with your old 401(k).

When you start a new job, you might be tempted to cash out your old 401(k). This should be your last resort. Avoid cashing out early because you will pay ordinary income taxes and a 10% penalty. Plus, compound interest only works if you allow your nest egg to grow over time without tapping in.

The Bottom Line

We all want our hard-earned retirement savings to grow in a tax-advantaged way. After all, that's the whole purpose of a retirement plan, right? Rolling your 401(k) into an IRA provides the most flexibility. But keeping your 401(k) where it is or transferring it to a newer plan are also perfectly fair choices. Whatever you do, avoid cashing out early to preserve your tax-deferred status and build wealth for a successful retirement.

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