The average American worker will have 11 to 12 jobs in their lifetime, according to the Bureau of Labor Statistics, and chances are several of these jobs will be with companies that offer a 401(k). But few people know what to do with these accounts when they leave their old jobs for new ones, so they often don't do anything at all.
While that is one option, it may not be the best one for you. Here's a look at all the possible ways to deal with your old retirement account.
1. Leave it where it is
It's not uncommon for people to leave their retirement savings in their old accounts after they leave their jobs. It's certainly the easiest route, but it's often not the smartest one. Your 401(k) likely gives you fewer investment choices than a traditional or Roth IRA, plus you could still get stuck paying the administrative fees even though you're no longer actively contributing to the account.
Another problem with leaving all your old retirement accounts where they are is that it makes your retirement savings more difficult to manage. You may stop rebalancing older accounts, and it's possible to forget about them entirely.
The only time it's a good idea to leave the money in an old 401(k) is if you have a lot of money in there and a good portfolio of investments that you'd like to stick with.
Even if you want to leave your money in your old retirement account, you may not be able to do so. If your account has less than $1,000 in it, your former employer can choose to force you out of the retirement plan by issuing you a check for the balance, minus income tax. If you put that amount into a new retirement account within 60 days, the withheld taxes will be returned to you with your next tax return. If you fail to put that amount into retirement savings, you'll pay an additional 10% early withdrawal tax on the full amount if you're under age 59 1/2.
You can still be forced out of your old 401(k) if your account has more than $1,000 but less than $5,000. In that case, your employer must transfer that money to an IRA. You don't get any say in which IRA it goes into unless you've indicated that you want the money sent to a new account that you've set up. More on that below.
2. Roll the money over to a new employer-sponsored plan
If your new employer offers a 401(k) and permits rollovers, you can have your old retirement savings transferred over to your new account. The advantage of going this route is having your money all in one place. The disadvantage is that your investment choices will still be limited compared to those offered by an IRA. You should note that this may not yet be an option for you if your new employer requires you to work for the company for a set period before enrolling in its retirement plans.
If you decide to roll over your old retirement savings to your new employer-sponsored plan, there are two ways you can go about it. The easiest way is to get your old plan administrator to transfer the funds directly into your new account. Your new job's human resources department will be able to help you fill out the necessary paperwork to initiate the transfer.
You can also elect to receive the full balance of the old account as a check that you must deposit in the new account within 60 days to avoid any penalties. If you fail to do so, you will be taxed on the full amount, and you'll pay an additional 10% early-withdrawal fee if you're under 59 1/2.
3. Liquidate the account
You can cash out your account by requesting that your employer send you a check for the full balance of your retirement account, but this is almost never the way to go. You'll be hit with expensive taxes and penalties in the short term, and you'll lose out on the compound interest that money could have earned in your 401(k).
Let's assume you make $40,000 a year and have $30,000 in your retirement account. If you cash it out this year, you'll pay 22% tax on it, reducing the total to $23,400. Individuals under 59 1/2 will also have to pay an extra 10% early withdrawal penalty, bringing that amount down to $21,060. And that's not considering any state taxes.
On the other hand, leaving that money in your old retirement account or transferring it to a new one enables you to continue growing those savings. If you're 30 years from retiring, that same $30,000 could grow into $302,000, assuming an 8% annual return. So if you are thinking about cashing out your account, just be aware that you could literally be throwing away hundreds of thousands of dollars.
4. Roll the money over into an IRA
This is usually the best option for most people. Rolling your old 401(k) over into an IRA opens up a whole new world of investments, so you have more freedom to choose where to put your money. You also have a greater choice of custodians. If you already have accounts with an investment company that you like, you can set up your new rollover IRA there so you can easily manage all of your savings in one place.
Transferring your old retirement savings to a new IRA is the same as transferring it to a new 401(k). You can either have your old plan administrator send the money directly to your new account or have them send you a check -- which, again, you must deposit within 60 days if you want to avoid paying any taxes or penalties.
Make sure you consider all of your options before deciding what to do with your old retirement account savings. What's right for one person isn't always right for the next, and what's right for you the first time you change jobs might not be the right move for your next job change. By evaluating all of your options thoroughly every time, you can keep your retirement savings manageable -- and growing.