If you have switched jobs recently, you are in good company as millions of Americans have changed their job so far in 2021. This means a lot of people have 401(k)s remaining with a previous employer’s plan. Along with the many other considerations associated with changing jobs, one of the more commonly faced questions is what should I do with my old 401(k)?
Option 1: Do nothing/leave your money in your previous employer’s 401(k) plan
When you separate from service with an employer, most 401(k) plans will allow you to leave your money in the plan if your account balance meets a minimum requirement (e.g. $5,000). This option is worth considering if you (1) like the investment options and if (2) the fees are reasonable. In addition, if your 401(k) is not fully vested when you leave your employer, you may consider leaving your money in the 401(k) if there is any chance you could go back to that employer and earn additional years of service. In many cases, this would allow your vesting schedule to pick up where you left off.
Option 2: Rollover your old 401(k) to your new employer’s plan
You may be able to roll over the 401(k) from your previous employer into your new employer’s 401(k) plan. You will need to check with your new plan administrator to see if this is an option, as some plans are stricter than others about accepting rollovers. This option is worth considering if you (1) prefer the investment options at your new employer and if (2) the fees are reasonable. This option allows you to simplify your financial life by consolidating your accounts.
Option 3: Rollover your old 401(k) into an IRA
There are many reasons why you may choose to roll over your 401(k) into an IRA. For most people, their 401(k) is the largest asset they own besides their home – especially for those who work for the same employer for an extended period. With that in mind, it makes sense that many people would choose to roll over their 401(k) into an IRA so they can benefit from personalized financial advice and ongoing monitoring of their account by a dedicated advisor. While a typical 401(k) plan might have around twenty investment options to choose from, an IRA allows investment in thousands of options. Additionally, IRAs are not subject to many of the costs associated with 401(k) plans, so in many instances, an investor might pay less in fees than in their old 401(k) plan. If you already have an IRA established, you can roll your 401(k) into that IRA which provides consolidation benefits.
Option 4: Cash out your old 401(k) and pay the penalties
To put it bluntly: cashing out your old 401(k) is a terrible idea, but that does not always stop people from doing it. If you are younger than 59.5 years old when you take this route, not only will the full amount be added to your taxable income for the calendar year, but the IRS will also assess a 10% penalty on the full amount.
401(k) Rollover Considerations Summary:
|Are you a “Do-it-yourself” investor, or do you prefer outsourcing investment advice to professionals?||Do you have a firm understanding of both your willingness and ability to take risk, as well as how to construct a portfolio subject to these constraints?|
|Does your 401(k)’s fund lineup offer an adequate selection of options to suit your personal needs?||Are you updating your allocation as your risk tolerance changes with age, changing life circumstances, etc.?|
|Do you have trouble keeping track of your financial life and would benefit from consolidating your investments to one location?||Do you know how the fees in your 401(k) compare to the fees associated with moving the balance to an IRA?|
Should you have questions about your 401(k) plan options, please call The Capital Group at 888-915-5192.
The above writing does not constitute investment advice, rather they are general guidelines and/or for informational purposes. Before acting on any analysis, advice, or recommendation in the above content, you should seek the personalized advice of legal, tax, or investment professionals. This page includes links to external websites over which The Capital Group has no control. The Capital Group provides no warranties as to the content or accessibility of the website and assumes no liability for errors or reporting inaccuracies reflected therein. The Capital Group has neither approved nor endorsed the statements made by the site. For more information about The Capital Group Investment Advisory Services, LLC and our investment philosophy, including information on fees, you may request a copy of our Form ADV Part 2A from our team at RIAInbox@capgroupfinancial.com.