If you’ve changed
jobs throughout your career, chances are you have at least one or two 401(k)s
with former employers. You’re not alone. In fact, millions of American workers
have done the same thing, and probably for similar reasons: They just got
distracted, feared making the wrong decision, or felt moving their money would
involve too much effort.
It’s important to make deliberate plans for those old
401(k)s, especially as you get closer to retirement. Here, in a nutshell, are
your options:
1. Leave your 401(k) exactly where it is
Doing nothing can be a conscious and very practical
decision. Just because you can’t contribute to a former employer’s 401(k)
doesn’t mean you have to take your money out of the plan. If you’re satisfied
with the investment options, performance, and fees, you aren’t required to make
a move. If, however, you forget to monitor the account and you’re an “out of
sight, out of mind” type person, then keeping your money with a former employer
may not be the most suitable — and profitable — choice for you.
2. Roll over the money to your new employer’s plan
There’s a lot to be said for consolidating your accounts,
especially when you don’t have a lot of time to devote to managing your
retirement savings. With fewer account statements and balances to check, it’s
much easier to keep track of your progress toward your savings goals.
Before you make a move, take a good hard look at the
investment offerings in your current employer’s plan. Is the core menu limited
or is the range of choices broad enough to support proper diversification and a
balanced, efficient portfolio? Are the fees reasonable or will they make a
significant dent in your investment returns over the years?
3. Roll over the money into a traditional IRA
Many of my clients ultimately decide that their best choice
is to roll money into a new IRA rather than another 401(k) plan. They find an
IRA provides additional flexibility and control by allowing them to shop for
investment options, including those with lower fees. When clients ask me if
it’s risky to move into an IRA, my answer is that it depends on what type of investment
they buy. If they’re investing their IRA in a short-term bond fund, then no,
there’s very little risk, but it’s a completely different story when their
choice is an aggressive growth fund.
One of the most convenient ways to execute the rollover is
to open a new IRA with a financial adviser or financial services company and
have your 401(k) plan administrator roll over the funds directly to that new
account. Direct rollovers escape the mandatory 20% tax withholding.
4. Take the money and run
As a financial adviser, I always counsel my client against
withdrawing or borrowing money that’s earmarked for retirement. Withdrawing
money from a qualified retirement account sacrifices tax-deferred growth of
your savings, increases your current tax bill, and jeopardizes your future
financial security. There are plenty of cons here, but I can’t think of one
pro.
As you’re making plans for your old 401(k)s, you don’t have
to go it alone. Consider consulting a financial adviser to help you evaluate
your options and make smart decisions.
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