On of the questions I get asked most is, “What should I do with my old 401(k) or old 403(b)?”
Quick Answer – Move the money into an IRA – NOW! (read more below, if you want details)
A quick definition of 401(k) from Invetopedia….
A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.
The Bureau of Labor Statistics say that the average person will have 11 different jobs between the age of 18 to 44. That is a new job every 2.4 years. When you move from one job to another you may leave behind an old 401(k). I have had people come to me with many old 401(k)s and they don’t know their options.
1. leave the money in your former employer’s plan;
2. roll over the money to your new employer’s plan, if the plan accepts transfers;
3. roll over the money into an IRA;or
4. take the cash value of your account.
If you take out the cash you will likely be subject to a 10% penalty and taxes on the amount you withdraw. If you take $100,000 of that old 401(k) you will pay the $10,000 penalty plus federal income tax at your marginal rate which could be as high as 39.6% AND state income tax. If you live in a high tax state you could lose more than half of the money.
You don’t want to leave the money behind in your old 401(k) and you don’t want to move it to your new job. 401(k)s are a nice idea but they also have some serious problems. While, you almost always want to collect the free match (if provided) from your employer you may not want to put in any extra money. ( I will do a post on this soon).
There are problems with 401(k)s:
1. Limited options
2. High and expenses are higher
3. No or poor advice
4. Poor performance
5. Loss of control (your company can change the plan without your consent)
You want to move the money out of that old 401(k) as soon as possible! You have all of the problems listed above but you may have some additional problems with an old 401(k) if you wait.
You may move and lose contact with the old 401(k).
The company goes out of business and you have to find the old 401 (k).
This can add extra work and stress to get the money moved and it gets worse with time. If you have an old 401(k) move it!
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NOTE: This post is part of an ongoing education series. This information is for educational purposes only. This information does not constitute investment advice. Please consult with your financial advisor before taking any action.