Our generation is nothing like our parents. Our parents generation would find a job, stay with the employer for life, get a gold watch upon retirement and be done with it. I’ve seen this too: my Dad worked for the same company for over 40 years. I’m in my mid-30′s and I’ve already worked for three employers since graduating college!
With this frequent job changing comes the importance of your retirement account. You should be saving money in a company 401k plan regardless of the length of time you are at the company. The trick starts when you leave the company. What do you do with the money you have saved? There are a few options you have. Below are what you can do with your old 401k and then what I recommend you should do.
Options For Old 401k Plan
Cash It Out
One option you have is to simply cash out your 401k and use the cash for whatever your heart desires. This is not recommended. You shouldn’t do this because first, you will pay taxes and penalties on the money you withdraw. In the end, your little chunk of money will become much, much smaller.
The second reason you shouldn’t cash out your 401k is because you will put yourself behind the eight-ball when it comes to retirement. That money can grow and compound over time (compounding and time being your best friends when it comes to investing) in large sums of money. Because of these reasons, you should not be cashing out your old 401k plan.
Leave It Alone
Unless the balance in your old 401k plan is small, you have the option to leave it alone and keep it at your old employer. There are advantages and disadvantages to this option. The advantages are that you keep the money invested, allowing it to grow over time. Also, depending on who custodies, your 401k, you might have a good plan. If, for example, Vanguard or Schwab custodies your 401k plan, chances are you are paying low fees on your investments. This might be a good reason to leave the money.
The disadvantages though are that you cannot invest any more money into this plan, ever again. Also, you might forget about the account in 10 or 15 years. You won’t think to update your mailing address with the custodian when you move and you will just lose track of the account.
Roll It Over
There are two options for rolling over your 401k plan. The first is to roll it over into an IRA. The second is to roll it over into your new 401k. Let’s look at each of these separately.
IRA Rollover: This is good choice because going this route allows for you to control the money 100%. You choose the custodian and the investments, allowing you to pick to lowest cost investments possible.
401k Rollover: This is a good choice because you again can control (to an extent) how your money is invested. Plus, you have one account to deal with, as opposed to a new 401k and a Rollover IRA.
The downside to the 401k rollover is the new plan. If your new 401k plan charges high fees, you will want to keep your old 401k money away from it.
In the end, there are really only 1 option for you when it comes to your old 401k plan. You should roll it over. Now, rolling it over into a new 401k plan or an IRA is a personal choice. When I left a job, I rolled over the 401k plan into the new 401k plan. I did this because my new 401k plan was with Schwab and I knew I had a lot of low cost investments to choose from. Had my new 401k plan been with a custodian that charged higher fees, I would have chosen a Rollover IRA.
Making sure you take your money with you is an important thing to do. Cashing out your 401k plan is a bad choice and leaving it at an old employer isn’t very wise either, for the reasons I mentioned above. By keeping tabs on your accounts and your money, you stand a greater chance of reaching your goals and financial freedom.