Here's What Happens When You Don't Roll Over Your 401(k)

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  • When you leave a job, you may have the option to keep your money in your old 401(k).
  • If you don't roll that 401(k) into a new one or an IRA, you might lose track of your money or leave it invested in assets that don't serve you well.

Many companies offer the benefit of a 401(k) plan, and it's a good option to take advantage of. Often, when you contribute money to a 401(k), your employer will match your contributions to some degree, allowing you to grow your long-term savings nicely.

But you may reach a point when you're ready to leave your job. You may, upon getting a new job, have the option to leave your 401(k) where it is rather than roll it over into an IRA or a new 401(k) plan. But that's not necessarily your best choice.

The problem with leaving your 401(k) where it is

Often, as long as your balance meets a certain threshold, you'll be allowed to keep your money in an old 401(k) even if you're no longer employed by the company sponsoring it. But if you leave your money alone rather than roll it over, a couple of bad things might happen.

First, you might forget that money exists. Capitalize, a service that helps people recover old 401(k)s, estimates there are more than 25 million "orphaned" 401(k) accounts that have been left behind at a former employer and forgotten about.

Even if your balance isn't that large, the money in that account is yours. Why should you risk giving it up?

Secondly, if you don't roll over your 401(k), you might remember it exists, but chances are, you won't be keeping tabs on how it's invested. That could lead to a situation where your investments don't grow your money the way you want them to, or where you end up losing a lot of money to costly investment fees.

That's why it's generally a much better idea to roll over your 401(k) once you separate from its sponsoring employer. Doing so could help you keep better track of that money and ensure it's being invested savvily.

Options for rolling over your 401(k)

If you're leaving a job, you have some choices when it comes to moving your 401(k). First, if your new employer has its own plan, you can opt to roll your old 401(k) into that new one.

If you don't have access to a 401(k) plan through your new job, you could instead open an IRA and roll the funds into there. If you have a traditional 401(k) and you decide you want to open a Roth IRA, you'll need to pay taxes on the sum you move over. But if you roll a traditional 401(k) into a traditional IRA, you won't face a tax bill in the process.

Either way, you should roll that money into an account you can manage easily, and one whose investment choices align with your strategy. One disadvantage of employer-sponsored 401(k) plans is that they generally do not allow you to invest in individual stocks, whereas with an IRA, that generally is an option. That could make it so you're able to put your money to work the way you want to.

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