It wasn’t really that long ago when people used to work for one employer their entire life. That was when the reward of a pension was commonplace.
With the proliferation of the 401(k) account that puts retirement planning squarely on the shoulders of the employee, changes have occurred in our culture that makes changing careers or employers multiple times the norm. Handled responsibly, the flexibility of a 401(k) account gives employees the power to move on to better things if they so desire.
But what happens to the money you contribute to a 401(k), especially when you’ve had accounts at different employers? It’s still yours! Whatever you do, no matter how small the amount, just don’t cash it out. If you’re under 59 1/2 years old, you’re going to get hit with a 10% early withdrawal penalty and will pay ordinary income taxes on the rest.
There are several things you can do with multiple 401(k) accounts.
Leave It With Your Old Employer
If you worked for a large company like IBM, you probably had access to fabulous investment options with super-low expense index funds. Hit yourself on the head for leaving! Just kidding.
Really though, if you had a great 401(k) plan with awesome investment options, you might do well by leaving it alone. Just don’t forget about it. Especially if it’s a significant sum you have socked away.
Take It With You
On the other hand, if you have access to a 401(k) plan through a payroll service like ADP, you probably only have craptastic high expense funds for investment choices. You’ll want to get your money out as fast as you can. You’ll also want to take your money with you if the idea of consolidating your accounts appeals to you.
Don’t even bother trying to cash out your 401(k) and doing the transfer yourself. If you don’t get the money into a new account within sixty days, you’ll get hit with penalties.
If you have a traditional 401(k), you’ll want to open a Rollover IRA (or transfer to an existing Traditional IRA) and have your financial institution transfer the assets for you. If you have a Roth 401(k), you’ll want to open a Roth IRA (or transfer to an existing Roth IRA) and have your financial institution move the funds to the new account. With either option, investment companies like Vanguard or Fidelity are great choices because of their low expense mutual funds.
Move It To Your New Gig
Now, if you’re moving from a job that has a terrible 401(k) plan to one that has a stellar plan, you’re good to go! You can move the 401(k) at your old employer over to the new employer. The investment adviser that manages the plan can handle the transfer for you.
My suggestion is to consolidate your 401(k) accounts as much as possible. It’s easier managing your asset allocation in one account as opposed to three or four with different investment choices.
Talk to me, Goose.