Did you know, a 401(k) is called a 401(k) because that is the IRC code section that describes the account? I am typically pretty picky with the “k” being in parentheses and being lower case, because that is how the code section is written.
Hope you learned something from this blog!
Moving on, this blog is two-fold:
1. A call to action for you to dig up any of your retirement accounts that are still with an old employer.
2. Consolidate these accounts (if you want) or make sure you continue to track them going forward. Too many times I hear people say “I forgot about this $10k I have with an old employer”.
I also want to point out that this blog is about “defined-contribution” retirement plans. There are also “defined-benefit” plans, or pension-like plans that will have different considerations.
So, aside from your current job’s retirement account (if applicable), make sure you find any old defined-contribution retirement plans and take one of the following actions:
Leave it
This is a legit (non)action and may make sense sometimes. Your old account may have low fees and great investment options which makes it appealing to keep it there.
The downside of leaving it is having another account that you have to track and review going forward.
I don’t often see employers requiring you to transfer your balance out, but it is their account and they may require you to do so within a certain time period.
Rollover to New Employer
Most employers will allow you to rollover an old retirement account into your new retirement account when you change jobs.
A pro is the simplicity of having one account to keep track of.
A reason you may not want to do this is if the new employer’s account has poor investment options or high fees. If they have low fees and great investment options, all the more reason to utilize it.
The decision to rollover old accounts into your new retirement account is different than the decision of making contributions (from your income) into the new retirement account. Make sure you evaluate that decision separately, as a retirement plan with high fees and poor investment options may still be worth it if there is a company match or other incentives.
Rollover to an IRA
An individual retirement arrangement, or IRA, is a retirement account that is not tied to an employer. It is an individually funded account, and can be opened by an individual at many large investment banks. Robinhood is currently not one of them.
Some companies may provide a SIMPLE IRA or SEP IRA as opposed to a 401(k); those are accounts that are tied to an employer (or for self-employed individuals) and are not the same as an IRA that I discuss below.
With an IRA, you have access to the entire public investment universe; this can be seen as a pro if you like the optionality, or potentially a con if it is overwhelming because of information overload and having to pick your own investments.
Some other pros are that you individually control these accounts and can add money (subject to limits) or take money out as you please (although not always recommended) and there are typically no fees associated with the account.
A con is that everything is done by you. Your rollover will come in cash, so make sure you are opening an account, depositing this cash and getting it invested. Additionally, if having the ability to contribute to a back door Roth account is important to you, rolling an old retirement account into an IRA may limit your ability to do so. This is beyond the scope of this blog, but if this is something that could impact you then I suggest you understand why this may limit your ability before completing the rollover.
Cash Out
Nobody is stopping you from cashing out your money! Although it likely is not advisable.
Pros are that you have access to your money if you want to use it.
Cons are that there will likely be taxable income as well as a penalty for an early withdrawal. You’ll also be giving up tax-deferred growth and potential tax-free distributions in the future.
Also, if your account is small enough, the company may be able “force out” your balance and send a check. You can either cash it and pay penalties / taxes or make sure you get that check rolled over into another eligible account.
Final Thoughts
What to do with your old retirement accounts can typically be decided by asking yourself what is best:
Financially, including fees, investment options and ability to maintain the accounts as qualified retirement accounts.
For convenience, by having minimal accounts to track and manage over a long-term time horizon.
There is no perfect answer and it is up to you to decide what is more important to you when it comes to your finances.
But, just make sure whatever you choose is intentional so that you do not forget about, or lose track of, your hard-earned money.