Got an old 401(k) or 403(b) you don’t know what to do with? You have a few options so let’s break it down so you can decide what to do with your old 401(k) even if what you do… is leave it alone.
According to a study done by Capitalize in May 2021, there are approximately 24.3 million forgotten 401(k)s holding approximately $1.35 trillion in assets, with another 2.8 million left behind annually.
$1.35 trillion in assets is such a large number it’s hard to even comprehend. Like a trillion is one million million. If you had a trillion dollars, and spent $1,000,000 everyday, it would take you about 2,740 years to spend it all.
That makes my brain break.
But the reason I share that number is because if you’re wondering what to do with your old 401(k)? Well, you’re certainly not alone and you’ve got a few options.
What should I do with an old 401(k)?
1) Leave it alone.
If it ain’t broke, don’t fix it– amiright?
Well, sort of with this scenario.
Technically, you can leave your old 401(k) where it is. It should still be invested, the only caveat is you can’t add any new dollars to it.
The biggest pro of this option is you don’t have to do anything– yay!
But there are a few cons.
Con #1: Losing your 401(k)
The biggest con of leaving your old 401(k) where it is is your old employer could change custodians at anytime, and suddenly?
You won’t know where your money is.
Don’t fret too much– it’s still YOUR money, you’re just going to have to track it down.
Which is annoying.
This actually happened to me. I waited too long after quitting my job and when I finally decided to roll it over, $100k was missing.
After a brief heart attack, I had to contact my old employer to understand what the deal was, and a long string of paperwork ensued.
Con #2: You may be forced out of it.
Now, likely– if you were going to be forced out of your 401(k), you would already know that.
But it’s worth talking about.
Your former may have a “force-out” provision, which means when your vested balance is less than $5,000, you could be forced to take your money out of the plan.
Your employer is required to give you advance notice of this rule so you can decide what to do, just remember– if you cash it out, you’ll want to roll it over into a new 401(k) or IRA quickly to avoid paying a penalty and taxes.
If you miss the notice and don’t respond, if your balance is less than $1,000, your employer will cash it out and send you a check or open an IRA on your behalf to deposit it into. If it’s more than $1,000, they’re required to put it into an IRA for you.
2. Roll it over into another 401(k)
If you’ve switched jobs, and your new boss has a 401(k) plan, you may want to roll over your old 401(k) into the new one. If you quit to become your own boss, you may also qualify for a solo 401(k) if you’re a solopreneur.
The biggest pro of this is that it’s relatively easy to do, and you can keep all your 401(k) money in the same space for easy organization.
The cons of this option is that some 401(k)s can have high fees and bad investment options.
So if this is the option you’re considering?
I always recommend checking out your 401(k) first to see if you even want to roll your old 401(k) into it.
If you go in and see that it just has high fee, actively-managed mutual funds, you might want to consider this next option.
3. Roll it into an IRA
Another option is to roll your old 401(k) into a traditional IRA.
IRAs have a wider range of investment options, giving you more control over your retirement savings. Not only that, but you also can choose your own brokerage. Essentially, you have full control.
The biggest con of this method is it can be a lengthy and confusing process. This option also disqualifies you from an easy Backdoor Roth IRA in the future because now pro-rata rule applies.
You can get around that limitation by rolling the IRA back into a 401(k) eventually, if your provider allows it.
Which option do I prefer?
The option I personally went with was rolling it into an IRA because I like the flexibility it gives me.
But I did cheat.
I used a free service that rolled the old 401(k0 into an IRA for me.
They called my old company.
They did all the annoying paperwork.
I just told them what I knew and they got the rest done.
This isn’t sponsored, but I do have an affiliate link for the company: Capitalize.
Highly recommend checking them out if this is the route you’re interested in.
The bottom line?
You’ve got options.
Which option are you going with?