A lot of times when we change jobs or start a new career, the last thing that we want to worry about is taking care of the money we have invested in that old 401k. There are simply too many other things to keep track of in a new job, not to mention everything we have going on in our life to begin with. With that in mind, let’s take a look at some quick and easy solutions for 401k rollovers and discuss the pros and cons of each.
Leave The Money Where It Is
The quickest and easiest solution is to simply do nothing with the money. In most cases, you are allowed to leave the funds in your old 401k account indefinitely. The money will simply remain in the specific investments that you’ve chosen, and you can even choose new investments as your old employer makes them available.
Pros: Quick and easy. There’s nothing quite as simple as doing nothing.
Cons: Choosing to leave the money with your old employer is really a temporary solution at best. This is probably not the wisest choice for the long term. Leaving the money in your old 401k means that you’re limited in your investment options, and you have limited control over the money. Move the money into a new account at the institution of your choice, and you’ll have more control and more investment options available.
Roll The Money Into A New 401k
Another quick and easy solution for a 401k rollover is to move the money into the 401k offered by your new employer. You can roll the money right in and have it invested in the same account as your new 401k. This is a popular choice for many people because it keeps all of your 401k monies together in the same place.
Pros: Many people like this option because of the simplicity. Instead of having multiple investment accounts spread out among different brokers and investment firms, you can have all of your retirement savings in one account with easy access. This is a big plus for people who are looking for a “set it and forget it” retirement plan and who do not want to spend a lot of time choosing investments.
Cons: Having all of your money invested in the same 401k account does limit your investment options. You’ll only have access to the specific funds and investments made available by your employer. If you are the type of investor who likes to have access to lots of different investment options, or if you want to invest in a specific stock or mutual fund, this is probably not the best option for you. Another drawback to rolling the money into your new 401k is that if you leave this job at some point down the road, you’ll have to go through the whole process again.
Early Withdrawal
The last quick and easy solution for dealing with an old 401k is to withdraw all of the fund in the account. Your ex-employer will sell everything that you’re holding in the account, and send you a check. This is a poor financial decision, for the reasons that we’ll see below.
Pros: Quick, easy, and you get some cash.
Cons: Where to start. First, if you pull the money out of your 401k, you’re working to defeat your own goals. You started putting that money aside for a reason (your retirement!) and pulling the money out now will negate any savings you’ve managed to do. Second, you’re going to pay taxes out the wazoo. The money that you put into a 401k is not taxed – until you withdraw it. If you cash out of your old 401k, the standard federal and state income taxes will apply. This will be 25 to 30%. In addition, a 10% penalty is tacked on top of that, so you’re looking at paying 30 to 40% in taxes right off the top. This means if you have $1,000 in your 401k, you’ll only receive $600 to $700 in cash.
Best Quick and Easy Solution
If you’re looking to minimize the amount of time you have to spend doing a 401k rollover, the best long term solution is to roll your money into your new 401k. The early withdrawal is clearly a bad choice, and leaving the money in your old 401k is really only good for a short amount of time. If you don’t have a new 401k available or if you want more investment options, then you’ll want to look into one of the more flexible 401k rollover options.