Each day, I am inundated with questions from my readers. If you want to send in a question send it to firstname.lastname@example.org. Here is one that I received recently that I want to share with you.
The Reader’s Question
What is, if any, the benefit of keeping a 401k account with a previous employer or should it be either rolled over or placed into a separate investment account (ie. IRA)?
Keep in mind there are 4 things you can with the 401k money from an old employer.
- Roll over the funds into an individual retirement account
- Leave your 401(k) behind
- Transfer the money to your new employer’s plan
- Take the money and run
The last option is the worst case scenario b/c of penalties. I wouldn’t do that one at all unless it’s really necessary.
Leaving Money In
People generally leave the money in their old 401k if they like the performance they are getting. You can do this if you have good solid investments that you’re happy with, and it’s not a problem to leave the money there. However there are some exceptions.
- If your account holds less than $1,000, your employer is allowed to automatically cash out your account when you leave.
- If your account holds between $1,000 and $5,000, most employers will automatically roll your 401(k) into an IRA when you leave your job.
- If your account holds more than $5,000, you must decide whether to leave your money behind or take it with you.
Leaving it in the old 401k also might alleviate some fees. Emphasis on the might! Mutual funds affiliated with 401(k) plans typically waive load fees for plan participants and transaction costs for 401(k) investors can be lower. Meanwhile, IRAs frequently charge an annual (though nominal) maintenance fee. However, if your 401k charges high fees, you might be better just rolling it over.
Rolling it Over
The benefits of rolling over to your own IRA or new 401k (if you got a new job) is control and possible lower fees.
Both traditional and Roth IRAs offer a wide variety of funds, individual stocks, bonds and certificates of deposit from which you can choose. That you can essentially invest in almost anything is a major benefit with IRAs, with 401(k)s you’re limited to investments that your employer provides and, in some cases, they may not be good.
If you opt to roll your fund into a traditional IRA, you will pay no upfront taxes, although you will pay tax on their withdrawals during retirement. If you roll over into a Roth IRA, you will pay their taxes upfront, but the earnings will grow tax-free.
The answer depends on how much you like your old 401k vs. the control you get from rolling it over.
What will you do?
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