By Greg Hart, CFP®
If you’re like most people these days, you probably haven’t worked for only one employer for your entire working career. Chances are, as you move through your career, you’ll start to collect 401(k)s from old employers that you don’t know what to do with.
Holding old 401(k)s isn’t necessarily a bad idea. But it’s also not always the best idea. It turns out, you have several different options when it comes to deciding what to do with your dusty ol’ 401(k)s.
Let’s take a look at the four most popular options, and then decide which is the most financially savvy one for you.
Option 1: Let It Keep Collecting Dust
Like I said, holding onto your old 401(k)s isn’t always a bad idea—especially if you’re invested in a good plan you wouldn’t have access to elsewhere. By leaving your money in your old employer’s plan, your investments will continue growing tax-deferred and you’ll remain protected against creditors. Plus, there’s absolutely no work on your part.
Option 2: Roll It Over To Your Current Employer’s Plan
If you also have a 401(k) with your new employer, it might make sense to roll your old 401(k) into this new account. By doing so, you’ll have one less account to worry about, retirement planning will be less complicated, and depending on your plan, you may even be eligible to take out a low-interest loan against the balance of your new 401(k).
Really, the only reason not to do this would be if your old 401(k) offered better options than your new 401(k).
Option 3: Roll It Over To An IRA
But what if your new company doesn’t offer an appealing or “better” 401(k) plan, or what if they have limited and/or inflexible investment choices?
Well, your next option is to roll over your old 401(k) into an IRA. If you don’t already have an IRA, you can easily open one via many different locations such as through most banks, brokerage firms, or via an investment advisor who can do most all of the set up work for you.
Whether you roll over into an IRA or a new 401(k), you’ll want to do it as a direct transfer. This will save you from extra work and potential tax penalties. A direct transfer means your funds will be sent directly from one financial institution to another, and you never have to touch the money, and therefore not taxed on the distribution, which would potentially be a big mistake.
Option 4: Cash Out
Unless you’re in crisis and are desperate for the money, this option should be avoided at all costs. Not only will your distribution be taxed as regular income, but you’ll also be slapped with a 10% early withdrawal penalty. (1)
If you’re considering cashing out for whatever reason, I urge you to speak with a financial advisor first to see if you have any alternative, less costly options.
How To Decide What’s Right For You
The purpose of this article was to lay out your options as simply as possible. But, in reality, comparing the nitty-gritty details of each plan can get complex, and just one wrong move could end up costing you significantly. That’s why before making any big 401(k) decisions, it’s best to speak with a financial advisor to help you assess the situation.
We at Haddon Wealth Management can help you calculate all the variables and determine which path will help you reach your financial goals the fastest. If you’d like to finally get those 401(k)s taken care of, give us a call at (856) 888-1744 or contact us online to schedule a complimentary get-acquainted meeting.
Gregory M. Hart, CFP® is the founder and managing director of Haddon Wealth Management, LLC, a registered investment advisory firm that provides comprehensive wealth management (in-depth financial planning and sophisticated investment management) for clients who value a relationship-driven approach that delivers customized solutions. Based in Haddonfield, New Jersey, Greg works with clients throughout the Delaware Valley, as well as nationwide. To learn more, connect with Greg on LinkedIn, visit our website at www.haddonwealthmgt.com, or call (856)-888-1744 to begin a discussion.