Saving responsibly for retirement used to involve working for the same company for an entire career, then retiring on a pension. Today, it’s rare that anyone would stay at one company for so long; in fact, the average time that people stay at a job is 4.1 years. Retirement savings solutions have evolved to offer the workforce different methods to responsibly prepare for their future finances. The most common retirement savings strategy offered by employers is a 401(k) savings plan, which allows employees to save pre-tax income in a managed fund.
It’s worth asking, though: if people stay at their jobs for only 4 years and open a 401(k) at a job that they leave, what happens to that money?
Luckily, there are several options to consider for managing your 401(k) from a previous employer so you don’t have to leave your hard-earned (and saved) money behind.
Leave it with your old employer
If you’re transitioning to a new job at a different company than where you opened your 401(k), there is the possibility you can simply leave your savings where they are. This is a good option for account holders who are satisfied with how their funds are being managed and don’t want the hassle of transferring their funds elsewhere. If you leave your 401(k) with your old employer, make sure to check in on the account from time to time to confirm that the way the funds are being managed are still satisfactory.
The possible downfall to this strategy is that if old 401(k) accounts are left with every single former employer, it could be difficult to track down the savings when it comes time to retire. It’s also important to organize documents for each account so potential heirs can access the funds.
Roll it into your new employer’s plan
Your new employer will likely allow you to roll your old 401(k) into their company’s retirement fund options. The account’s tax-deferred status will remain intact and all of your retirement assets will be in one place and easier to track.
Roll your 401(k) into an IRA
If you transfer your 401(k) to an IRA, there are several distinct advantages:
- You retain your tax-deferred status and will not be subject to penalties.
- IRAs give you access to a wider variety of investment options than most 401(k) accounts.
- You’ll be able to continue to contribute to your rollover account.
- You’ll have the option of rolling your account into a Roth IRA. If you choose this option, you will be subject to taxation on the assets you roll over, however, you will not have to pay taxes on the money you withdraw when you reach retirement age.
- It is worth noting that you cannot take a loan against your IRA like you can with your 401(k).
Remember that you must transfer the funds from your old 410(k) into a new tax-deferred account within sixty days of closing your 401(k) account with your old employer to avoid penalties.
Everything that’s been discussed to this point can be categorized under more traditional means of saving for retirement. They’re proven financial models that are a great fit for people who are okay with “slow and steady” strategies.
However, new and different ways of managing your old 401(k) are emerging. Thanks to technology, the world of investment is rapidly being democratized, and if you have a high tolerance for high-risk, the following options could be worth considering.
Cash it out
The clear downside to this option is you’ll be taxed and penalized for cashing out your 401(k) before retirement age. There’s typically a 10% early withdrawal fee on top of the taxes subject to the cashed-out funds.
However, there’s always a possibility that the funds you cash-out could be put to work in other investments if you are okay with the taxes and fees. If that is something you can handle, the advantage of having funds freed up for investments not accessible through a 401(k), such as real estate, could be incredibly rewarding (but not without risk).
Roll it into a Self-Directed IRA
This option is very similar to rolling your old 401(k) account into an IRA. However, the difference is a self-directed IRA (SDIRA) offers access to non-traditional assets such as real estate, cryptocurrency, and gold. Self-directed IRAs tend to outperform stocks and bonds over time and also give the investor more control over their account. They are starting to become more popular among people saving for retirement.
If you’ve been put in the position of wondering what to do with an old 401(k), the good news is you have options. Remember that there’s no perfect answer for everyone as money and investing are highly personal and individual matters. You have the opportunity to position your money in different ways as the financial world continues to evolve along with everything else.
If you’d like to learn more about making passive income from real estate, sign up for Ark7 today and start learning about how to invest with our SDIRA.