Recently, I wrote a piece on the importance of having and contributing to a 401k if offered by the employer. Putting money away now and taking advantage of possible employer matches is paramount to making sure there is a nest egg when you are no longer able or willing to work.
Over a typical working career, many of us will or already have had multiple former employers, so it’s not uncommon to have a few “dormant” 401ks remaining at those institutions. What should be done with them? How do you help them continue to grow? I have repeatedly come across this scenario with clients and, it’s important to be aware of the options and benefits available once one leaves an employer.
Anytime you leave an employer, it’s a great idea to rollover, or transfer your 401k, to an IRA (Individual Retirement Account) as soon as possible. It gives you more control over those otherwise abandoned assets. The longer a dormant 401k is left to linger, the greater the chances “outta sight, outta mind” comes into play and the opportunity to further control those assets is lost. Lets take a look at the pros and cons of rolling a 401k over.
Firstly, by rolling a 401K into and IRA, the assets are able to maintain their tax-deferred status. One of the benefits of a 401k is that when the investments grow and appreciate, that growth is not taxed. By rolling an old 401k into an IRA, you get to maintain that benefit. Sometimes, the process is misunderstood as a taxable transfer, which it is not.
Additionally, once the assets are transferred into the IRA, you are able to gain even better control of how the assets are managed. Within IRAs, one can invest in mutual funds, individual stocks, ETFs, bonds, and even real estate. The more tools and choices available, the greater the potential that you can maneuver the markets and reach your goals. This simply is not the case with 401ks. 401ks have their own set of benefits, but they only offer mutual funds that are pre-set for that account, one does not have access to the entire mutual fund world, let alone stocks, ETFs, etc.
IRAs also allow you to add new money into the account, up to $5500/yr if you are 50 ½ years of age or younger and $6500 if you are 50 ½ and older. There are no employer contributions involved since these accounts are individually owned or titled. Obviously, with abandoned 401ks, contributions of any kind are not possible. One no longer works for that employer, so there are no more payroll contributions being added to that 401k.
I have worked with many clients who have multiple abandoned 401ks, and consolidating them into a single IRAs definitely makes management and retirement planning more efficient. If you find yourself having one or more old 401ks lingering at former employers, reach out to me. Let’s get those funds consolidated, appropriately managed, and put them in a position where you can contribute, better track your progress against your goals, and get those assets back in your control!