In the midst of changing jobs, whether taking on a new full time job or striking out on your own, you might have left behind an old 401k plan. Most of the time, we forget about our 401k plans because they operate on their own: a portion of your earnings automatically goes into your plan and sometimes your company matches it. What more is there to think about? But when you change a job, it’s important to keep track of your plans and consolidate them. That way, you ensure that they are invested well for you.
So, what should you do with your old 401k account, or the handful you have from your career? Essentially, you have three main options:
Do Nothing: Leave the old 401k alone (but not forgotten)
If you have the account in a plan that you like, i.e. the investment choices are good, leave it alone, but stay on top of it. If you can, invest it in a target-date fund, or a fund that invests your money during a specific amount of time, and it will automatically manage the funds for you. Most importantly, don’t forget to check in periodically so that you don’t acquire any unnecessary fees, and you make sure it’s growing in value.
Transfer your old 401k to your new 401k
To keep things simple, if your new employer offers a 401k plan that has attractive investment choices (meaning it’s low cost and has funds that can track the overall stock or bond markets), the easiest option is to transfer your old 401k plan to your new 401k plan. Then, as you add new funds and receive new matching amounts, your money remains all together.
Rollover your 401k to an IRA
Another option is to take your 401k and “roll” it over into an Individual Retirement Account (an IRA), where you can then invest it however you want. The primary advantage of this option is that you can control how it’s invested. If the options in your old or new 401k plan are not so attractive, you can use an IRA as an alternative and invest in whatever stocks, bonds, or funds you’d like. This way, you’re more in control of the funds.
Read More: Investment Fees Matter!
Investor Beware! Double Check Your Different Types of Contributions
Different types of contributions to your 401k require different kinds of accounts.
Be sure that if you have contributed “pre-tax” money to your old 401k that it’s going into a Traditional IRA or a regular 401k. If you have contributed “after-tax” or “Roth” contributions to your 401k, those need to go into a Roth-IRA or Roth-401k. Essentially, pre-tax money goes to a pre-tax account, and after-tax money goes to an after-tax account. If you don’t match the money to the correct account, it could result in a complicated mess of taxes and reporting!
Now, you could also take your “pre-tax” 401k or IRA and convert it into a Roth IRA. This is a very technical, but potentially very beneficial move, because once the pre-tax money converts into the Roth account, you never pay taxes on it again, no matter how much it grows. You should consult with a professional before doing this type of conversion.
An old 401k plan doesn’t need to sit gathering dust. Check on it to see if your plan is really building wealth for you. Remember, this is money you worked hard for. Getting the best performance out of it only mirrors what you had to do to earn it!
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Jim is a financial advisor and owner of Thinking Big Financial, Inc. Thinking Big Financial is a fee-only registered investment advisor offering financial planning and investment management services. Specializing in working with the LGBTQ Community.
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