Congratulations! You’ve reached your retirement goal—or you’re starting a new job better suited to your talents. Now, what should you do with your old 401(k) that you diligently cared for over the years? Let’s review the options.
This is the simplest alternative — and the most dangerous. You may be tempted to spend too much, or all, of it too soon. Plus, if you cash out, you’ll be liable for taxes, at your ordinary-income rate, on all the funds in the plan. And you’ll pay an additional 10% penalty if you’re younger than 59½, or 55 in some cases.
Be aware: If your 401(k) balance is under $5,000, the plan administrator may distribute the money to you automatically in a lump sum or move the balance into an IRA.
Let It Ride
Many retirees and job-changers decide to keep their old 401(k)s. Of course, they can’t contribute anymore, and any employer match will be gone. But if you’re happy with your investment choices and performance, you may be able to hold on to your plan and continue enjoying tax-deferred compounding.
Be aware: Most 401(k) plans offer limited investment choices, which can be changed at will by the employer. Further, your company may not allow you to continue participating, and your plan fees (if any) may change after you leave the company. If you’re going to a new job, compare your new and old plans carefully.
Roll It Over Into a New 401(k)
If you’re moving to a new job with its own 401(k), you may be able to roll over your old plan into the new one. You’ll also have the benefit of consolidating your funds, which makes evaluating your retirement portfolio easier.
Be aware: Not all employers allow rolling other plans into theirs. If you do like the new plan and wish to roll over into it, do so within 60 days of leaving your old job or you will incur taxes on the money.
Roll It Over Into an IRA
For new retirees, this can be a very attractive option. You’ll preserve tax-deferred compounding, you’ll control your own money, and you’ll be able to choose from a very large universe of investments and providers. Fees on IRA accounts are variable, but may be lower than on a 401(k).
Be aware: IRAs usually don’t have quite the level of protection against fraud and bankruptcy that most 401(k)s do. If you can still contribute to a plan, annual limits on IRAs are much lower than on 401(k)s. And the responsibility for making good investment choices will be on your shoulders — though many IRA providers offer investment advice. Traditional 401(k)s need to be rolled over, at least initially, into traditional IRAs, just as Roth 401(k)s must go to Roth IRAs — within 60 days in both cases to avoid a tax bill. Further, if you’re still working past age 70½ you may be able to delay taking Required Minimum Distributions from a 401(k) plan, but not from an IRA.