In today’s world, it’s not uncommon for people to change jobs every few years. In fact, over $3.1 trillion has been left behind in old 401(k) accounts, simply because people don’t know what to do with them when they leave their jobs. But here’s the good news – that money isn’t lost forever. With a little effort, you can locate these funds and move them to a better place, where they can continue growing for your future. Here are five of the best ways to handle your old 401(k).
1. Transfer It to Your New 401(k) Plan
In most cases, rolling your old 401(k) into your new employer’s plan is a solid choice. This keeps your retirement savings organized and gives you access to the same benefits of an employer-sponsored plan, including the ability to make backdoor Roth IRA contributions. However, if your new plan has high fees or limited investment options, it might not be the best option for you. Otherwise, transferring it to your new 401(k) is usually the easiest and most straightforward move.
2. Move It to an IRA
Another common option is rolling your old 401(k) into an individual retirement account (IRA). An IRA is similar to a 401(k) but is not tied to an employer. This can give you more control over your investment choices. However, one downside is that it can affect your ability to make backdoor Roth IRA contributions. If you have other pre-tax IRA funds, including SEP IRAs or Simple IRAs, those balances will be included when calculating the pro-rata rule. This rule could cause part of your backdoor Roth contribution to be taxable, which could reduce the benefit of this strategy.
3. Roll It Into an IRA and Convert It to a Roth
If you want to enjoy tax-free growth, consider converting your old 401(k) into a Roth IRA. This option requires you to pay taxes on the funds at the time of conversion, but once the money is in the Roth, it grows tax-free. This is especially beneficial during low-income years, as you’ll pay a lower tax rate on the conversion. Additionally, it allows you to continue contributing to a backdoor Roth IRA without worrying about the pro-rata rule. However, be sure to pay the conversion taxes using cash to avoid a 10% penalty.
4. Leave It Where It Is
In some cases, the best option is to leave your old 401(k) where it is. If the account is invested well and the new 401(k) options are poor or expensive, it might make sense to leave things as they are. The downside is that you may forget about the account down the road, which could be problematic. But if the current plan is working for you and your new employer’s plan doesn’t offer better options, leaving it where it is can be an acceptable choice.
5. Cash It Out
Though I don’t recommend it, cashing out your 401(k) is still an option. If you decide to go this route, keep in mind that you will have to pay income taxes on the amount you withdraw, along with a 10% early withdrawal penalty if you are under 59½. This can seriously set you back financially, so it’s generally best to avoid cashing out your 401(k) unless absolutely necessary.
What If You Can’t Find Your Old 401(k)?
If you’ve lost track of old retirement accounts, don’t worry – there are services that can help you find them. Tools like Beagle, the National Registry of Unclaimed Retirement Benefits, and Free Erisa are great resources to track down lost funds.
Make sure to keep your retirement accounts organized and consider consolidating them as you move from job to job. The best time to do this is when you transition between positions, making it easy to move your funds without any hassle.
By taking control of your old 401(k), you can avoid fees and lost opportunities, setting yourself up for a secure retirement.