Old 401(k) accounts can be likened to outdated items hanging in the back of your closet. Although you know action is needed, they continue to remain largely unnoticed. It’s important to remember that just like those old clothes, your former 401(k) accounts shouldn’t be neglected. If you’re among those who’ve postponed dealing with an old 401(k), there are several critical steps to follow to move forward.
Step 1: Evaluate the value of your account. If your previous employer’s 401(k) holds over $7,000, you have the option to leave the funds where they are or transfer them into an IRA or your current employer’s 401(k). However, if your balance is below the $7,000 mark, your choices may become limited.
Step 2: Decide whether to remain within the 401(k) framework. Assuming your balance exceeds $7,000, your next decision is whether to transition the funds to an IRA or maintain them in a 401(k). Moving assets from an old 401(k) to a no-fee IRA with a reputable mutual fund company or discount broker is often a wise choice. Nonetheless, some individuals value the extra creditor protection offered by maintaining 401(k) assets, as well as particular investment options unique to 401(k) plans.
Step 3: Evaluate the quality of your 401(k) choices. If you believe keeping your funds in a 401(k) is more advantageous than moving them to an IRA, conduct research on your available 401(k) options. You must also decide whether your previous employer’s plan or the one offered by your current employer is the better choice.
Step 4: Identify the ideal IRA provider. If you’ve decided that transferring to an IRA is the best path, your next task is to select a suitable brokerage firm or mutual fund company. Seek a provider that offers a wide array of high-quality investment options without additional fee layers for IRA holders. Target-date funds present an excellent, low-maintenance investment choice.
Step 5: Consider converting traditional 401(k) assets to Roth. When rolling over contributions from a Roth 401(k), the new account will also be Roth, ensuring qualified withdrawals remain untaxed. If you possess traditional 401(k) assets, assess the possibility of converting them into a Roth account simultaneously with the rollover.
Step 6: Execute the plan. After deciding to roll over funds into an IRA, complete the necessary paperwork or online forms to open the IRA. Proceed by requesting a direct rollover from your 401(k) plan to the new IRA provider. Rolling over to your current employer’s 401(k) might be more complex. In either case, ensure that the 401(k) provider directs the check to the provider, not to you. If made out to you, 20% of the balance will be withheld for income tax purposes. You then have 60 days to deposit the money into an IRA or other 401(k). Failure to do so results in a withdrawal, incurring ordinary income tax and a potential 10% early withdrawal penalty, unless you’re over 55.
Step 7: Decide on investments. Upon rolling over assets from an old 401(k) to another 401(k) or IRA, determine the allocation strategy for these assets. If all your retirement savings were within your previous 401(k), a robust target-date fund offers a straightforward, low-maintenance retirement investment. For those with multiple retirement accounts, a rollover is an excellent opportunity to reassess how these pieces integrate, identifying any investment gaps.
