The decision that could impact your retirement for decades
Every year, millions of Americans change jobs. And when they do, they often leave behind something more valuable than the company laptop, which is their old 401(k).
This may have happened to you, your friends, your family, or your kids. What now?
If you've recently switched employers, retired, or simply have a forgotten retirement account sitting somewhere, you're faced with an important question about your 401(k).
Should you take it, leave it, or roll it over?
The answer can significantly impact your long-term financial future.
Option #1: Take It
Let's start with what is often the worst choice.
When people leave a job, they sometimes cash out their 401(k) because they need money, want to pay off debt, or simply don't know their options.
The problem?
If you're under age 59½, you'll generally owe ordinary income taxes plus a 10% early withdrawal penalty on the amount withdrawn.
Imagine you cash out a $100,000 401(k).
Depending on your tax bracket, you could potentially lose $30,000 to $40,000 or more to taxes and penalties before the money ever hits your bank account.
Even worse, you've removed money that was supposed to compound tax-deferred for decades.
A $100,000 account growing at a historical average of 8% annually could become more than $1 million over 30 years, though past performance is not indicative of future results.
That's a very expensive check to cash.
Option #2: Leave It
In some cases, leaving your money in your former employer's plan can make sense.
Many large-company 401(k) plans offer institutional investment options with low fees and strong fund selections. Some plans also provide legal protections and unique withdrawal provisions.
If you're happy with the investment choices and the costs are reasonable, leaving the money where it is may be perfectly acceptable. But at the same time, the choices can be limited and sometimes with underperforming investments.
The downside?
Over time, people often accumulate multiple old 401(k)s from different employers. It's like trying to babysit three kids in different backyards. Before long, they have retirement accounts scattered across several companies, making it difficult to track investments, beneficiaries, fees, and overall asset allocation.
Retirement planning becomes harder when your money is living in five different places. This is mostly because when it comes time to take Required Minimum Distributions, you'll be more challenged having 401(k)s or IRAs in different places, which is why many people consolidate.
Option #3: Roll It Over
For many people, rolling an old 401(k) into an IRA can offer greater flexibility.
A direct rollover allows you to move the money without creating a taxable event. Once the assets are in an IRA, you'll typically gain access to a much broader range of investment options than most employer plans provide.
You can also consolidate multiple retirement accounts into one location, making it easier to manage your portfolio, monitor performance, and coordinate your retirement strategy.
Just be careful to execute a direct trustee-to-trustee rollover. If the check is made payable to you personally, you could accidentally create taxes, withholding requirements, and deadlines that become costly mistakes. Always compare costs and benefits for the best decision for your family, and we do this weekly at Exit Wealth®.
The Right Answer Depends On Your Situation
There is no one-size-fits-all answer.
If you're still working and happy with the plan, leaving it may make sense.
If you need simplicity and greater investment flexibility, a rollover could be the better move.
And unless you're facing a true financial emergency, cashing out should usually be the last resort.
The Bottom Line
Your old 401(k) isn't just another account.
It's a piece of your future retirement income.
Before making a decision, you should understand the tax consequences, investment options, fees, and long-term impact of each choice.
Because when it comes to retirement savings, the biggest mistake isn't changing jobs. It's leaving your money in a backyard nobody's watching.
Ted Jenkin
CFP®, AWMA®, AAMS®, CEPA® Managing Partner & Chief Marketing Officer · Exit Wealth®
All opinions expressed in this newsletter is for general informational purposes and constitutes the judgment of the author(s) as the date of the newsletter. The opinions and views expressed by the author are personal and based on economic or market conditions at the time of publication. Actual economic or market events may turn out differently than anticipated. Nothing in this material is intended to serve as personalized investment, tax, or insurance advice. These opinions are subject to change without notice and are not intended to provided specific advice or recommendations for any individual.
The material has been gathered from sources believed to be reliable, however Exit Wealth® cannot guarantee the accuracy or completeness of such information, and certain information presented here any have been condensed or summarized from its original source. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always, please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.
