Speaker 1: Welcome back to Better Financial Health in 15
Minutes or Less and I'm Stacey Hyde.
So today we're going to talk about what to do with an old
employer retirement plan, whether it be a 401k plan, a
403b.
And if you've ever switched jobs and, let's be honest, who
hasn't you may have an old retirement plan sitting out
there and you may be wondering what to do with it.
So here's a quick stat that might surprise you Over 25
million 401k accounts worth over 1.3 trillion that's trillion
with a T are sitting, forgotten or unmanaged.
According to a firm called Capitalize, that's like leaving
your paycheck behind when you leave the building.
So that could be a good thing.
It could be a bad thing.
So let's talk about your four main options.
You can leave it where it is.
Generally speaking, it depends on the plan, but if you have
more than $7,000 in the plan, you absolutely can leave it
where it is, and if you work for a very large employer, chances
are it's very low cost and may have a pretty good investment
menu.
The bad news is is you're more likely to forget about it and
forget to look at it periodically.
The second option and I think this is a good option for a lot
of folks is you can roll it into your current employer's plan.
There's some advantages there.
You focus on that one because you've got money going into
there out of your current paycheck.
It keeps all your workplace retirement money in one spot,
but you are limited to the New Plans investment options.
One thing that this option gives you or leaving it where it
was is if your income is too high to make a traditional Roth
IRA contribution, you may want to make sure that you leave your
pre-tax money in an employer 401k, because that opens up the
option for a backdoor Roth IRA to you and don't want to get off
on a tangent on that.
We have talked about that before.
It's a way that you can make an after-tax contribution to a
traditional IRA and then convert it to a Roth and all that you
pay tax on is that interest.
So that's something you may want to look at.
Your other option that you have is you could roll the money into
an IRA.
So if you roll money out of an employer plan, it rolls into an
array and that's non-taxable.
If you had money in Roth, you actually have to roll it to a
Roth IRA and then you roll the pre-tax employer contributions
any money that you put in that was not Roth, goes to a
traditional IRA.
The downside to this is, if you want to add this Roth money
back into a 401k down the road, you can't do that For a reason
known only to the IRS and federal tax regulations.
You can roll money out of a traditional IRA into a 401k plan
, assuming the 401k accepts it, but you cannot roll Roth IRA
money into a Roth 401k in a plan .
So just something to keep in mind if that's something you
want to be able to do.
And a Roth IRA can give you more investment options, but it
can also have higher costs than an employer plan and you may not
be able to get the institutional level investment
options that you can get through your 401k.
The last option and I feel like we should have a flashing red
warning siren going on is you can cash it out.
The problem with that is is you're subject to regular income
taxes plus an additional 10% penalty tax on that money.
So what that means is, if you made $75,000 at your job last
year but you took, you cashed out $50,000 because you thought,
oh, that's great, I'll pay off my car.
Well then, all of a sudden, next year, when you do your
taxes.
Your income is not $75,000.
Taxes your income is not $75,000, it's $125,000.
Plus, you're going to owe an extra $5,000 in taxes plus your
regular income tax rate, which is likely.
If you're a single person and you've got $125,000 in income,
you're probably going to owe about $20,000 in taxes, but your
withholding was based on your earnings of $75,000.
So that can be a rude awakening .
So those are your four options Leave it where it is, roll it to
your new employer's plan, roll it to an IRA or cash it out.
So how do you choose?
Look at fees and expenses Is your old plan charging you more
than a typical IRA or new plan?
If you worked for a really small employer, that may be the
case.
Investment choices Do you have a good broad range of investment
options?
Do you have a managed account option or a target date option
that has solid performance that you can just not worry about it?
Also, if you need access to a loan, having the money in your
current employer's 401k plan can allow you to borrow that money.
Rather than paying tax on it, you have to pay it back.
Paying tax on it, you have to pay it back.
I'm not a big fan of 401k loans , but oftentimes it can be
cheaper than certainly cheaper than credit cards, can be
cheaper than other types of loans that you might be able to
get, so you do have that option if your employer offers loans on
the 401k.
And then consolidation having your money in fewer places can
really help you.
Less decisions, less things to keep track of.
All 401ks aren't dangerous, but they can easily be neglected and
you forget about them.
So make a list of any 401ks you've left behind.
And, fun fact, when you apply for Social Security plan,
sponsors are required to report to Social Security any lost
account owners that they've not been able to find.
I had one client who found a 401k of like $40,000 from a
place that he'd worked for in his 20s he was 65 because he was
applying for Social Security.
So people do lose track of these, and so it is a good idea
to you know.
Make a note, check in every year, make sure you've got
online access and then decide what you're going to do with
that.
So take charge of your financial future.
Make sure all your money's working for you.
Thanks again for tuning in.
This has been another episode of Better Financial Health in 15
minutes or less.