Understanding Your Options for Old 401(k)s

When you switch jobs, it's not just about the new opportunity but a chance to make smart choices with the 401(k) you've built up at your old job. Let's get right to what you can do with it:

Keep It Put: Sometimes, you can just leave your savings right where they are if your old job's plan allows it. This could be a good fit if you like the investments they offer.

Move It to the New Job: If your new work has a retirement plan and is okay with it, you can roll your old savings into their plan.

Roll It into an IRA: By moving your savings to an Individual Retirement Account (IRA), you keep all the tax benefits and could get even more investment choices.

Cash Out: This means taking the money out completely but heads up, this might cost you in taxes and penalties, especially if you're under 59½ years old.

Some plans may only let you stay if your balance is above a certain amount. If you're thinking about an IRA, remember that with a traditional IRA, you'll pay taxes later when you take the money out, while with a Roth IRA, you could take out the money tax-free if you follow the rules.

Pros and Cons of Keeping Your Old 401K

Pros:

• Familiarity: If you keep using your old 401(k) plan, you won't have to learn how to use a new one with different choices and ways of doing things. It's sticking with what you're used to.
• Low-Cost Investments: Some jobs offer investment options with lower fees than regular investment options, which could save you some money on fees.
• Continued Employer Stock Benefits: If your job gives you stocks as a benefit and the stocks have a special tax treatment that helps you save money, you might want to keep the same plan to keep getting those benefits.

Cons:

• Investment Limitations: Sometimes, when you have a retirement plan through your employer, you might be unable to choose all the investments you want. Creating a personalized investment plan that fits your goals and needs can make it harder.
• Varying Plan Fees: Sometimes, when you stop working for a company, you may have to pay more fees to manage your retirement savings. These extra fees can reduce your earnings over time.
• Withdrawal Restrictions: It may not be easy to take out your money from your retirement account early, depending on the rules of the plan.

Pros and Cons of Rolling Over to Your New Employer's Plan

Pros:

• Consolidated Accounts: Rolling your old 401(k) to your new employer's plan allows you to keep all your retirement savings in one place, making it easier to manage and keep your financial picture clear.
• Unified Investment Strategy: With all your retirement resources under one plan, it becomes easier to implement a cohesive investment strategy and ensure your portfolio aligns with your retirement goals.
• Modernized Plan Features: Your new employer's plan might offer updated features, better investment options, or improved user experience and educational tools compared to your old plan.

Cons:

• Vesting Schedules Reboot: When you roll into a new plan, previously vested funds remain so, but any employer contributions in the new plan could be subject to a fresh vesting schedule.
• Limited Investment Choices: The new employer's plan could have fewer investment options than your old plan or a personal IRA, limiting your ability to diversify your portfolio.
• Plan-Specific Fees and Expenses: New employer-sponsored plans may come with different fee structures or higher expenses that should be carefully considered compared to your previous plan.

Rolling Over to an Individual Retirement Account (IRA)

Pros:

• Wider Investment Selection: IRAs often provide access to a broader range of investments than 401(k), allowing for more personalized and possibly sophisticated investment strategies.
• Potentially Lower Costs: Fees associated with IRA accounts can be lower than those charged by 401(k) plans, particularly if you shop around for the best rates.
• Flexibility in Withdrawals: IRAs typically offer more flexible withdrawal rules, which can be advantageous when planning for retirement distributions.

Cons:

• Age Restrictions on Penalties: Withdrawing funds from an IRA before age 59 ½ may result in penalties, whereas a 401(k) may allow for penalty-free withdrawals if you retire at age 55 or older.
• No Loans Allowed: IRAs do not permit loans, unlike many 401(k) plans, meaning you can't borrow against your IRA without incurring taxes and potential penalties.
• Mandatory Distributions: IRAs (excluding Roth IRAs) have required minimum distributions (RMDs), even if you do not need the funds, whereas 401(k)s may offer more flexibility if you’re still working.

Cashing Out your 401(k)

Pros:

• Immediate Access to Funds: Cashing out your 401(k) provides you with immediate liquidity. This can be helpful if you urgently need cash for major expenses or debt repayment.
• Simplicity: This option can be straightforward – you close the account and receive your money without worrying about managing the funds or future investment decisions.
• No Market Risk: Once you cash out, you won't have to worry about market fluctuations affecting your 401(k) balance. Your money is no longer subject to the ups and downs of the stock market.

Cons:

• Tax Penalties: Cashing out a 401(k) before reaching age 59½ typically incurs a 10% early withdrawal penalty in addition to the ordinary income tax due on the amount withdrawn.
• Loss of Retirement Savings: By taking the money now, you lose the advantage of tax-deferred or tax-free growth, potentially reducing your retirement savings significantly.
• Impact on Financial Aid: If you have children attending college, cashing out can increase your taxable income and affect financial aid calculations for the following year.

Choosing the Right IRA for You

Now, let's talk about which IRA might suit you best. There are two main types to consider:

Traditional IRA: Think of this one as a "pay taxes later" piggy bank. You might get a tax break now when you put money in, but when you take it out in retirement, you'll pay taxes then.

Roth IRA: This one's the "pay taxes now" account. You pay taxes on the money you put in now, but later, all that money withdrawn is tax-free.

For more information about IRA Types, check out this IRA Basics article.

Investment Options: Picking What's Right for You

With an IRA, you get a ton of options, like:

Stocks: These are like having small pieces of a company. When the company does well, you do well, but they can also be unpredictable.

Bonds: You're basically lending money to a company or the government, and they pay you back with interest.

Mutual Funds: Imagine a bunch of investors pooling their money to buy stocks, bonds, or other stuff managed by professionals.

ETFs (Exchange-Traded Funds): Similar to mutual funds, but you can buy and sell them on the stock market like you do with stocks.

None of these options are without risk and investors should always be cautious of where they put their money. Learn more

Setting and Reaching Your Retirement Goals

Got your IRA and investments sorted? Awesome. Now, let's turn our attention to making your retirement dreams a reality.

When we talk about setting goals, imagine your ideal retirement. What does it look like? Are you traveling around in an RV, volunteering, starting a new hobby? Whatever your vision, having a clear picture helps determine how much you'll need to fund it.

You want to ensure you're putting away enough now to live that dream later. Life's full of surprises, and what you want now might change. Everyone’s goals are different in retirement. That’s why it's important to stay flexible with your investing. Be ready to mix things up with your savings if needed.