Connect with us


The 3 best steps to take with an old 401(k), according to a money expert: ‘Choose your own adventure’



About 50 million Americans quit their jobs last year, and many left behind more than open floor plans and micromanaging bosses.

As of earlier this year, job switchers had left their money in some 29 million 401(k) accounts with former employers, according to estimates from financial services firm Capitalize. That’s about 25% of money in all 401(k) plans.

Capitalize describes these as “forgotten” 401(k) accounts, but that’s not necessarily the case. Depending on your unique financial situation, leaving your assets where they are might be the financially savvy move.

Generally, when you change jobs, you have three tax-efficient options for your 401(k) account. You can:

  • Leave it in your old employer’s plan
  • Roll it over into your new employer’s plan
  • Roll it into an individual retirement account

“Think of it as a choose your own adventure scenario,” says Jason Betz, a certified financial planner and private wealth advisor at Ameriprise Financial. “The adventure aspects are altogether more boring, but it’s still really important. So you need to ask yourself some questions.”

Here’s what to consider when weighing your options.


Leaving your money in your old 401(k)

The upside: Simplicity. Typically, as long as you have $5,000 invested in your employer’s plan, you can leave it there when you leave. If you like your old plan, that can make things simple — no paperwork, no worrying about incurring tax penalties if you don’t move your money around the right way.

And there may be a lot to like. They may have a roster of mutual funds to choose from that you like. You may be invested in holdings — such as a target-date mutual fund — that you were going to set-and-forget until you retired anyway.

And because you’re investing as part of a large group of employees, rather than on your own, you may have relatively low investment costs, especially if you work for a large firm, says Yoav Zurel, CEO of financial services firm Pontera.

“Consumers should be thinking about fees that they have in their in their 401(k),” he says. “Employers have an ability to negotiate institutional funds, rates that consumers typically cannot get on their own. This is because of buying power the employer has.”

The downside: There are a few. A 401(k) plan comes with limited investment options, and the ones in your old plan may not be very attractive. The fund options, the expense ratios they charge and the overall management fees charged by your 401(k) provider should all factor in to your decision, says Zurel.

Plus, you run the risk of actually “forgetting” about your account or keeping it on the backburner when you still need to be keeping an eye on it.

“When you’re part of a group, you’re not in total control of your destiny, and that’s a risk,” says Zurel.


Rolling over to your new employer’s 401(k)

The upside: Consolidation. If you’re managing your own finances, it can make sense to have everything in front of you in one place. That way, you can keep an eye on your entire portfolio each time you log into your account.

This makes a lot of sense for people who gravitate toward simple, passive investing strategies, which tend to be available in just about every 401(k) plan, says Betz. “You’ll still have to line up the investment options, costs and fees to see if you can make a really strong argument for rolling it over rather than leaving it in the old plan,” he says.

The good news is, if you determine you like the new plan’s investments, fees and suite of financial resources — some plans offer consultation with financial advisors, for instance — you can often ask your old employer to initiate a direct transfer to your new plan to avoid running into any tax penalties associated with withdrawing the money in cash.

The downside: You just may not be into the new plan.

A 401(k) is just about always going to come with a limited menu of investment options, and maybe this one is full of high-fee, low-performing mutual funds. Maybe the website stinks and it’s difficult to manage your investments on it. In those cases, it might make sense to choose an option with more flexibility.

Rolling into an IRA

The upside: Flexibility. An IRA rollover is the clear choice for someone who wants to take a more hands-on approach with their investments — whether on their own or with the help of a financial advisor.

That’s because, while a 401(k) may come with a wide array of funds to choose from, IRAs give you access to virtually any investable asset you can think of, including stocks, bonds, mutual funds, exchange-traded funds and sometimes even cryptocurrency.


That flexibility means it’s easy to find investments that keep your costs low. Plus, you’re no longer paying a firm to oversee the management of your portfolio.

The downside: It can be a tedious process. You’ll likely have to get on the phone with both your old 401(k) company as well as the brokerage you choose to open your IRA with.

Things can get even trickier if, say, you invested in a Roth 401(k) but your employer matched your contributions in the form of a traditional 401(k). Failing to transfer your assets properly could result in tax penalties.

Plus, let’s face it. Flexibility is not a plus for everyone — especially if they’ll be tempted to use money in their IRA earmarked for retirement saving to make risky investments.

“Selections within a 401(k) plan have undergone due diligence and are generally going to be pretty good,” says Zurel. “In an IRA [you have access to] all stocks, options — you can invest in startups. It’s the Wild West.”

DON’T MISS: Want to be smarter and more successful with your money, work & life? Sign up for our new newsletter!

Want to earn more and land your dream job? Join the free CNBC Make It: Your Money virtual event on Oct. 17 at 1 p.m. ET to learn how to level up your interview and negotiating skills, build your ideal career, boost your income and grow your wealth. Register for free today.


CHECK OUT: Will a government shutdown hurt your investments? ‘The headline answer is no,’ says analyst

Source: CNBC

Follow us on Google News to get the latest Updates