3 Steps to Moving Your Old 401k

August 2, 2016

3 Steps to Moving Your Old 401k

Do you have an old 401(k) with a previous employer? Given the fact that on average a person stays at a job for less than five years and will have about 12 job changes in their career, it is extremely likely that somewhere along the way a 401(k) is left in that trail of job changes.

If you have an old 401(k) and have been meaning to do something about it (like I’ve been meaning to) but haven’t gotten around to it, it’s time to stop procrastinating, and it’s time to take action finally.

One reason people avoid or delay doing a financially-related task is that they don’t understand it, or there is a fear that it is complicated. After all, the unknown can be scary, and doing nothing is just easier. But doing nothing can be harmful, and in this case, it is costing you (us) money.

So, what are your options and where do you start? Take these three steps to finally take action and take care of your old 401(k).

Step #1 – Find Out Where Your 401k Is

It’s essential to find out where your old 401(k) is. If you don’t know where your money is, then it is likely not working for you. When you left your previous employer, you should have received distribution paperwork for your 401(k). If it’s been a while or you have no idea where the paperwork is, contact your old employer and request it.

Do this as quickly as you can. It’s possible your employer’s plan has a new servicer, the plan has been terminated, or if the balance of your 401(k) is less than $5,000 your previous employer could have processed an involuntary rollover distribution. Find your money!

Step #2 – Review Your Options

Generally, you will have the following options. This is an overview; you will need to take the specifics of your situation including age, amount in your 401(k), and other factors into consideration.

Rollover Your 401k to a Retirement Plan With Your Current Employer

If your current employer offers a 401(k) or other retirement plan, you likely have the option of rolling over your old 401(k) into it. Check with your HR department or plan administrator.

Pros: The process is relatively simple. The convenience of having your retirement plans consolidated and in one place.
Cons: Fewer investment choices than with an IRA. Possible accumulation of several 401(k)s if you change jobs multiple times.
How: Do a direct rollover by completing both the distribution paperwork from your previous employer and the rollover paperwork from your current employer. Be sure not to “bring the money home” or you will be taxed, and depending on your age, hit with an early withdrawal penalty.

Rollover Your Old 401k To a Traditional IRA

One of your options is to rollover your 401(k) into a Rollover or Traditional IRA.

Pros: The process is straightforward. More investment options than a 401(k). Greater control over the account as it is not tied to an employer.
Cons: Depending on your choices, there is potential for higher fees with an IRA.
How: You can open an account with a brick-and-mortar investment firm or within minutes with an online firm such as Fidelity, Charles Schwab, or Vanguard. You will then do a direct rollover by completing the distribution paperwork from your previous employer. Again, do not bring the money home.

Rollover Your Old 401k To a Roth IRA

If you fall within the income limits, you can rollover your old 401(k) into a Roth IRA.

Pros: If you qualify, you will be able to take advantage of the tax-free growth offered by the Roth IRA.
Cons: You will need to pay taxes on the balance of the 401(k) either when you do the distribution or when you file your taxes for the year in which you did the rollover.
How: As with the IRA, you can open an account with a brick-and-mortar investment firm or within minutes with an online firm such as Fidelity, Charles Schwab, or Vanguard. You will then do a direct rollover by completing the distribution paperwork from your previous employer. Avoid bringing the money home.

Leave Your Old 401k With Your Previous Employer

You can choose to leave your 401(k) right where it is.

Pros: Depending on the old plan, and your current 401(k) or retirement plan, you may have better investment options with the old 401(k).
Cons: Potentially higher administrative fees since you are no longer with the company. You cannot contribute and you miss out on other options you would have with a current employer’s 401(k).
How: Check with the HR department of your previous employer if there are any steps to take.

Cash Out Your Old 401k

You do have the option of cashing out the 401(k).

Pros: Yay cash!
Con: You will have to pay taxes on that cash, plus an early withdrawal penalty depending on your age. You’ve unplugged your investments from future earnings and have defeated the purpose of contributing to your 401(k) in the first place.
How: To cash out your 401(k), you would simply select that option on the distribution paperwork. However, this is a big “don’t” unless you are experiencing extreme financial hardship.

Step #3 – Act!

After you’ve reviewed your options, make the decision to act. Again, give careful thought to the specifics of your situation, and decide what works for you.

I encourage you to give yourself a specific amount of time to decide what to do with your old 401(k). Pick a date and put it on your calendar. There are three steps here so, as an example, you could give yourself three weeks to move your money.

The point is to give yourself a deadline to work towards that ensures you will take action.

Will you take these three steps to move your old 401(k)? Let me know in the comments!


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