What to Do with Your Old 401(k)

You get a new job, everything is going smoothly, and you’ve set up your direct deposit and 401(k) contributions with HR. But a few weeks later, you realize that your 401(k) from your previous job is just sitting somewhere. You’re unsure how it’s performing or what you should do with it. What are your options? There are three main choices: leave the 401(k) where it is, transfer it to your new company’s 401(k) plan, or roll it over to an IRA.

Rolling Over to a New 401(k) or IRA: What’s Best for You?

If you’re happy with the 401(k) plan your new employer offers, rolling over your old 401(k) is a simple process. A direct rollover transfers the entire amount to your new 401(k) without taxes or penalties, and it allows you to manage and track only one 401(k) account. However, transferring the money to an IRA is another viable option, and it often comes with several advantages. IRAs offer greater flexibility, more investment choices, and often lower costs than 401(k) plans.

Peter Mallouk, president and chief investment officer of Creative Planning Inc., suggests, “100 percent of the time, when a person has a choice of staying in a 401(k) or rolling to an IRA, they should roll it over to an IRA. You go from a limited investment venue to an unlimited number of investment opportunities that open up.”

At Gainplan, we believe we can offer better investment advice through an IRA, providing a more hands-on approach to managing your money tactically and helping to manage risk.

Traditional vs. Roth IRA: Which One Should You Choose?

If you decide to roll your old 401(k) into an IRA, you’ll need to choose between a traditional IRA or a Roth IRA. With a traditional IRA, your investment is tax-deductible now. You contribute pre-tax money, which reduces your taxable income for the current year. On the other hand, Roth IRA contributions are made with after-tax money, but qualified withdrawals are tax-free. The idea behind a Roth IRA is that you’ll likely pay taxes at a lower rate now compared to when you withdraw the money years down the road.

In addition to tax benefits, an IRA offers more estate planning options. While 401(k)s typically pay out in a lump sum to your beneficiary, IRAs offer more flexible payout options that may better suit your needs and those of your loved ones.

Leaving the Money in Your Old 401(k): A Last Resort

You can also leave the money in your former company’s 401(k) plan, but there are a few caveats. The account will no longer be eligible for additional contributions, and you may lose out on important information about the plan, such as changes to fees or investment options. The biggest mistake, however, would be cashing out the account. Cashing out means you’ll be taxed and penalized, which takes you a step backward in terms of retirement planning.

Whatever you choose, be sure to make an informed decision that aligns with your long-term retirement goals.

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