You spent years building up your old 401(k). Now that you’re at a new job, or have decided to be a stay-at-home parent, you may be left wondering what to do with your old account. Obviously, you don’t want to lose the money you invested. Let’s take a closer look at what you should do with an old 401(k).
Let It Stay Where It’s At
The company you previously worked for may allow you to keep your old 401(k) in their plan. This has many benefits. First of all, you don’t have to make any changes. Second, if you’re over 55, you can make penalty-free withdrawals. There may be lower investment options and there’s even protection against creditors. There are also downsides though, such as not being able to continue to contribute to the plan or take a loan from the account. Plus, you are stuck with the mutual funds your old employer has chosen.
Roll the Money Over Into an IRA
You can also roll the money over to an IRA tax and penalty free. The will allow you to continue contributing to the account in a tax-free manner. You also have the benefit of more investment options and control over the account. This option is my personal favorite and what I did with my old employer 401(k) when I quit my job to stay home with my son.
First-time home buyers under the age of 59 ½ can withdraw money penalty-free. There are also no penalties for higher-education withdrawals if you’re under that age. A problem is that there may be less protection from creditors. You also want to carefully research the fees of the provider you’ll be moving to.
Move to Your New Employer’s Plan
Of course, if you’ve switched jobs, you can also move your 401(k) to your new employer’s plan. You’ll have all the benefits of a 401(k). The important thing is to review are the investment options available through your new employer.
Cash It Out
Last, but not least, you can also choose to cash out your old 401(k). If you are under the age of 59 ½, you should really consider other options. Not only will you have to pay taxes on the funds, but you will likely also have to pay a 10% early withdrawal penalty. This can be a huge chunk of money depending on how much is in your account. Plus, you won't have that money in savings for your future retirement.
That old 401(k) has many options. You can let it set, roll it into an IRA or into a plan at your new employer, or you can cash it out. Each option has benefits and drawbacks. Review each option carefully before making your decision. The wrong decision can cost you a lot of money.