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.
Joel Johnson, a certified financial planner, is managing partner of Johnson Brunetti, a Connecticut-based retirement and investment firm. He is a resident of Tolland.