Speaker 1: Welcome back to Better Financial Health in 15 Minutes or Less and I'm Stacey Hyde.
Speaker 1: 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.
Speaker 1: 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.
Speaker 1: 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.
Speaker 1: According to a firm called Capitalize, that's like leaving your paycheck behind when you leave the building.
Speaker 1: So that could be a good thing.
Speaker 1: It could be a bad thing.
Speaker 1: So let's talk about your four main options.
Speaker 1: You can leave it where it is.
Speaker 1: 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.
Speaker 1: The bad news is is you're more likely to forget about it and forget to look at it periodically.
Speaker 1: 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.
Speaker 1: There's some advantages there.
Speaker 1: You focus on that one because you've got money going into there out of your current paycheck.
Speaker 1: It keeps all your workplace retirement money in one spot, but you are limited to the New Plans investment options.
Speaker 1: 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.
Speaker 1: We have talked about that before.
Speaker 1: 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.
Speaker 1: So that's something you may want to look at.
Speaker 1: Your other option that you have is you could roll the money into an IRA.
Speaker 1: So if you roll money out of an employer plan, it rolls into an array and that's non-taxable.
Speaker 1: 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.
Speaker 1: 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.
Speaker 1: 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.
Speaker 1: So just something to keep in mind if that's something you want to be able to do.
Speaker 1: 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.
Speaker 1: The last option and I feel like we should have a flashing red warning siren going on is you can cash it out.
Speaker 1: The problem with that is is you're subject to regular income taxes plus an additional 10% penalty tax on that money.
Speaker 1: 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.
Speaker 1: Well then, all of a sudden, next year, when you do your taxes.
Speaker 1: Your income is not $75,000.
Speaker 1: Taxes your income is not $75,000, it's $125,000.
Speaker 1: Plus, you're going to owe an extra $5,000 in taxes plus your regular income tax rate, which is likely.
Speaker 1: 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.
Speaker 1: So that can be a rude awakening.
Speaker 1: 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.
Speaker 1: So how do you choose?
Speaker 1: Look at fees and expenses Is your old plan charging you more than a typical IRA or new plan?
Speaker 1: If you worked for a really small employer, that may be the case.
Speaker 1: Investment choices Do you have a good broad range of investment options?
Speaker 1: Do you have a managed account option or a target date option that has solid performance that you can just not worry about it?
Speaker 1: 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.
Speaker 1: Rather than paying tax on it, you have to pay it back.
Speaker 1: Paying tax on it, you have to pay it back.
Speaker 1: 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.
Speaker 1: And then consolidation having your money in fewer places can really help you.
Speaker 1: Less decisions, less things to keep track of.
Speaker 1: All 401ks aren't dangerous, but they can easily be neglected and you forget about them.
Speaker 1: So make a list of any 401ks you've left behind.
Speaker 1: 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.
Speaker 1: 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.
Speaker 1: So people do lose track of these, and so it is a good idea to you know.
Speaker 1: 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.
Speaker 1: So take charge of your financial future.
Speaker 1: Make sure all your money's working for you.
Speaker 1: Thanks again for tuning in.
Speaker 1: This has been another episode of Better Financial Health in 15 minutes or less.