Q: I have a 401(k) from a previous job. The reason it’s still there is because I don’t know what to do with it. What should I do?
A: You have a number of options with this leftover money. Here are some of those options:
- Cash out the retirement plan. This is a bad and costly option. If you cash out before age 59 1/2, you could face a 10% penalty; plus, you have to pay taxes on your earnings. Bad, bad move.
- Let the money be. If you are happy with the investment options in the old plan, then there’s no reason to move the money. Just so you know, if the amount in your account is more than $5,000, your former employer can’t force you to cash out. If you stay in that plan, you’ll still be able to direct where the money is invested, but you won’t be able to borrow from your account.
- Roll the money into your new employer’s plan. Tax law changes made back in 2001 allow portability between retirement plans; so, it’s now possible to roll money from your retirement account into a new employer’s plan, even if it’s not the same type of plan. You will need to check with your new employer, because some employers make you wait up to a year before you can enroll in their 401(k) plan.
- Open a rollover IRA. For many people, this is the best option, because you control how your money is invested. You are not limited to the investment options in an employer plan. If you choose to roll your old 401(k) money into an IRA, make sure it’s a direct transfer of the money. If your employer makes the check payable to you, the company has to withhold 20% of the money for payment to the IRS. To transfer funds directly, all you have to do is fill out an application for a rollover IRA and send it to the financial institution of your choice. The new IRA custodian will process the transfer for you.