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How to Deal with an Old 401(k)

Many people these days have more than a few 401(k)s from previous jobs.  When you move from one job to another and have an old 401(k) to deal with, you have several options.  These options are:

•    Do nothing – If you don’t make any decisions and leave your 401(k) where it is, the money that was contributed will continue to accrue investment returns or interest.  Your money will stay in the same plan, with the same fees and terms. For some people this is the best options, especially if the company you are moving to doesn’t offer a retirement plan or if you will be self employed.

•    Cash out – You have the option to cash out a 401(k) and put the money in your pocket.  This is a very bad plan unless you have lost you’re job and have no other options.  When you cash out a 401(k) before you retire you are risking your financial future.  Of course, you will be able to recoup the savings at another job, but you will never be able to regain the time that is lost earning interest on the savings. Money that is contributed to a 401(k) when you’re in your twenties is work a lot more than the money that is contributed when you’re in your forties. It’s best for investments to age as long as possible before they are cashed out.  Additionally, 401k-helpyou will be required to pay an early withdrawal penalty of 10% and 28% in taxes when you cash out a 401(k).

•    Rollover to a personal IRA – This is the option that provides the most flexibility.  With this option you will e ale to put your investments anywhere that you want to.  You won’t be restricted to plans that your employer offers.  This is often the only choice for individuals that will be self employed aside from leaving it where it is.  The drawback to moving a 401(k) to an IRS is that there might be an annual fee and you will have less protection against creditors.

•    Rollover to new employer’s plan – For most people this is the best option.  a 401(k) can e rolled over without any penalties.  This is by far the simplest way to deal with an old 401(k).  You’re investments will all be in one place, making it easy to monitor how well your investments are performing.  In addition, all future contributions will be added to what was rolled over.  Because you will be limited to the options and plans that your new employer is offering, make sure you read everything very careful so you understand what is available.

These are the four most common options.  However, you might be able to roll your old 401(k) into a Roth IRA.  With a Roth IRS, post-tax dollars are deposited and can be withdrawn, tax free, after retirement.  Most people pay less tax on their retirement dollars when a Roth IRA is funded rather than a 401(k) or traditional IRA.

This is a brief overview of your options.  You may find that your individual circumstances require a different approach.

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