What to do with your old 401(k)

Huzzah! You have a new job! Then your former employer sends you a letter asking if you want to move the money out of your old 401(k). What are your options and which is the right one for you?

First, let’s look at the options:

1. Leave it there

If you have more than $5,000 in your 401(k) then your former employer is required by law to allow you to keep the money in that plan. If the 401(k) was a great, low-cost plan, or if you have a lot of company stock in the plan this may be a good idea, but know that every time you need to interact with the plan you usually go through your former employer. They approve loans and withdrawals made from the plan, and even rollovers (transfers to another 401(k) or an IRA).

2. Withdraw it all

This is a tempting option sometimes, but beware: withdrawals from your old 401(k) will not only count as taxable income for the year of the withdrawal, but if you aren’t 59.5 years old when you make the withdrawal, you’ll be hit with an extra 10% penalty tax! In addition, you’re taking money from your retirement goal, which can grow with compounding and be very helpful later on. This really should be a last resort.

3.Put it in your new 401(k)

Depending on your new employer’s 401(k), after you are eligible to start contributing, you may be able to bring your old 401(k) into your new one. This is nice for simplicity, and if your new 401(k) is a good plan it can be well worth it. However, 401(k)s have a lot of fees associated with them that are usually paid by the participants, and if you can get the same investments outside of the 401(k) for cheaper, that means your money will grow faster for your retirement.

4. Put it in an IRA

This is usually the best option for most situations (not always though, see above). To do this, you need to open an Individual Retirement Account (IRA) for the money to transfer into, then contact your 401(k) administrator and ask how to transfer the money into an IRA. This varies from plan to plan, but usually involves a short form that asks for your new account information.

When considering which company to open the IRA with, the main thing to determine is what fees if any there are for opening or maintaining an account. There will be trading fees, the investments themselves will have some internal fees, and if you are working with an advisor you should expect either a fee based on your assets or something similar. Trade fees should be around $7 per trade. For Mutual Funds or ETFs, look for ones with lower fees. I like Vanguard because they focus on keeping fees as low as possible, and if you have your IRA with Vanguard they waive a lot of their trade fees on their own products. Finally, most advisors charge 1% of assets that they manage, or less. If there are any other fees, search for them online and see what you find out about them.

5. Ask an expert

If you’re still confused, find a CFP® professional and ask their opinion. Beware anyone who brings up their returns or suggests in any way shape or form that they can make a certain return in the stock market. A few trustworthy places to look for help from a CFP® who is strictly fee-only are the National Association of Professional Financial Advisors (NAPFA), the XY Planning Network, and the Garrett Planning Network.