Recently Change Jobs? Don’t Forget About Your 401(k)
We live in a time when we can switch up our lives a lot. I’m 32 years old, and across the arc of my adulthood I’ve changed out each of the following four times: Boyfriends (eight-month max-out), hair colors (platinum blonde, really? With this faint yet still very black mustache?), and toothbrushes (should probs do that more). Over that period, the average person changed her job the same number of times.
It’s not a bad thing! Finding the right fit is important. But the giant errand that is switching companies leaves us with an additional piece of pesky cleanup work: dealing with old 401(k) accounts.
Most companies or places of hire offer some sort of retirement savings plan — the most common is a 401(k). Hopefully, you are taking advantage of it! Because 401(k) plans are always tied to the employer, you can’t add in new money once you and your company part ways. Hypothetically, if you switched jobs four times you could have four 401(k) accounts — three of them obsolete. This is not ideal. No one is good at managing their money scattered across different accounts. Can’t keep track of your mother-bleeping keys because they’re always in a different spot at home? Yeah, it’s like that.
With old 401(k) accounts, you have two good options:
Roll them into an IRA
Roll them into your new, active 401(k)
We’ll cover the pros and cons of each, but first understand why both of these options work: Both 401(k) accounts and IRA (Individual Retirement Arrangement) accounts are designed for retirement money and share the same tax benefits. Only accounts of the same “tax status” can ever be smushed together to live in harmony. 401(k) and IRA accounts are both considered “pre-tax” money — you don’t pay income taxes up front, but you will pay income taxes later, when you use the money, in retirement.
Option 1: Roll into an IRA
Pros: This option is great because you can treat your IRA like a home-base for all of your old 401(k) accounts. Done with one? Pop it over into your home-base IRA. It’s an easy process.
Another perk of using an IRA at a brokerage bank is that you can buy most any type of investment, including low-cost options that might not be available in a 401(k). A 401(k) relegates you to a list of funds pre-selected by your employer, which limits your investment flexibility.
Cons: You will always be managing at least two retirement accounts (one active 401(k) and one IRA), and perhaps three if you open a Roth IRA, which cannot be combined because it’s taxed differently. (For more info on the different retirement accounts, check out my breakdown of each!)
How? The process: If you do not have one already, open a traditional IRA at a brokerage bank of your choosing. I recommend a low-cost bank like Vanguard, Charles Schwab, or Fidelity. Once your IRA is open, call the bank that holds your old 401(k) and request a rollover to your new IRA. They should be able to process your request on the phone. If not, they can direct you to the paperwork online.
Option 2: Roll into your new 401(k)
Pros: You keep all of your pretax retirement money in one place, which makes it easier to invest using one cohesive strategy. (Again, this wouldn’t apply to a Roth IRA.)
Cons: It is sometimes harder to roll a 401(k) plan into another 401(k) plan because they have more rules than IRAs. 401(k) plans generally have limited investing options, which is fine if they are good options! Worst case, these options are expensive or have hidden fees. Before moving more money into an active 401(k) plan, investigate both the fees charged by the account and the investing options.
How? The process: Know the bank that holds both your active and old 401(k). Call the bank of your old 401(k) and request that they roll it over into your active 401(k). Similar to the process with an IRA, they should be able to complete the task over the phone. If not, they can direct you to the paperwork.
Rollover, Not Distribution!
Whether you are moving the money into an IRA or your new 401(k), “rollover” is your keyword. Just imagine one account gently rolling into the other, like two waves coalescing while you sit on the beach and smoke a freshly-rolled (see what I did there?) doobie. NO DRAMA.
A rollover means that THIS IS NOT A TAXABLE EVENT. The word “distribution,” on the other hand, can imply a taxable event — and NOT what you want. You are welcome to move money between pretax accounts without worry of triggering any tax alarms, so make sure the phone rep knows your intention.
Your old 401(k) bank will tell you that they can either send the funds electronically or they will have to mail a check. Of course, an electronic send is best. If that’s a no, push for them to send the check directly to the new bank. If that’s a no, and they send the check to you, it’s OK — just make sure you deposit the check in your active IRA/401(k) within 60 days. After that, they assume you’ve taken a distribution and you are taxed and fined.