What can I do with my old retirement plan?
So you landed a new job. Congrats!
Now you are left asking, “What do I do with my former retirement benefits?”
Unless your former employer didn’t offer you one (or you didn’t contribute), chances are you have an old 401k, 403B, or Simple IRA lying around.
You have a couple choices of what to do with your old work retirement account.
1. Do Nothing
That’s right! If you don’t want to do anything, you don’t have to. If it is invested, it will continue to ride the waves of the market and hopefully grow for you. If you haven’t made any investment changes inside the account since you were hired, chances are that it is invested into a Target Date Fund. What’s that? Essentially a target date fund holds investment positions with more risk/reward opportunity the further out you are from retirement. The closer you get to retirement, safer investments (aka bonds) start to replace the riskier investments (aka stocks) to create a more stable portfolio for you. It is not uncommon at all for us to work with a client that pleasantly discovers an old 401k that has been investing behind the scenes for them for the last 10+ years, completely unbeknownst to them.
2. Cash it out
There are a ton of reasons that people choose to cash out their old retirement plan when they leave their job. Perhaps you have some debt you want to take care of, or maybe you want to plump up your emergency fund.
Most people don’t understand how detrimental this option is to their overall financial plan. Here are some of the things to keep in mind before you deposit that check:
a. Be prepared to pay
Not only will you have to pay tax on whatever you cashed out, if you are pre-retirement age (younger than 59 1/2), you will pay a 10% penalty as well. Ouch. That means if you have $10,000 in a retirement account, are thirty years old, and are in the 20% tax bracket, you will pay $3,000 in tax and penalties to cash out.
b. You may end up playing the ‘catch-up’ game with your retirement
Never underestimate the power of compounded investment returns. Consider this: If your retirement account averages a 10% return, it will double in value roughly every 7.2 years. Frankly, that’s incredible. So let’s say that Joe is thirty and has $10k saved in retirement and he is averaging a 10% return. By age 37, he will have around $20k (and that’s without contributing). 44.4 years old? That’s $40k. If we keep up those returns, at age 66 he will have about $320k in that account. However, if Joe at age thirty decides to cash out that $10k, his future 66 year old self is going to be in a much different financial position.
3. Roll it over into a an IRA (Roth or traditional)
There are tons of advantages of rolling your old retirement account into an IRA. First of all, this gives you all the control of how this is to be invested. You can handpick funds from the entire market, which is far more extensive than the limited investment options inside your work plan. This ability in and of itself is a huge win for rolling your plan over.
Secondly, you can decide if you want to roll this into a Roth IRA or traditional IRA. The Roth IRA is going to grow tax free, while the IRA will grow tax deferred. However, if your old retirement account is all pre-tax and you want to move it to a Roth IRA, watch out! This is called a Roth conversion (something we guide our clients through). Whatever you move from pre-tax retirement funds into after-tax retirement funds will have to be claimed as tax for next year.
Finally, If you want to move pre-tax assets into after-tax (Roth) assets, moving your account from your old work retirement plan into an IRA gives you all the control of when to do so. You can convert it all at once, or a little bit each year to keep you in the most favorable tax bracket. Your pick.
Do you have an old 401k plan you are trying to figure out what to do with? We’d love to help you find the right investment solutions for you. Contact us today!