What To Do and Mistakes To Avoid With Your Old 401(k)

Have you recently left a job, been laid off, or just started a new one? If so, you’re not alone in wondering what to do with your old retirement accounts. This is a crucial topic that often gets overlooked due to a lack of education about the available options, causing many people to lose track of their old accounts or make hasty decisions. Some feel the need to cash out their savings when they leave a job, while others leave a trail of 401(k) plans behind as they move from job to job. We’re writing this to help you avoid common mistakes that can be made when you deal with your old retirement accounts and to educate on your options.

1. Avoid Cashing Out Your 401(k)
When leaving a job, resist the urge to cash out your 401(k). Cashing out can be costly, both immediately and long-term. You’ll face income taxes and a 10% early withdrawal penalty if you’re under 59 ½. More importantly, you’ll lose the future growth potential of your retirement savings.

2. Be Cautious with Rollovers
If you decide to move your 401(k) to another plan or an IRA, you have two main options: direct transfer or rollover. A direct transfer is generally the safest method to avoid penalties. If your employer sends a check, you have 60 days to roll it over into an IRA or another qualified plan. Missing this window can incur penalties, and you’re only allowed one grace period every 12 months.

3. Consider the Benefits of an IRA
Moving your money into an IRA can consolidate your retirement savings and provide more flexibility. Unlike 401(k) plans tied to an employer, a self-direct IRA can offer a broader range of investment options. However, some employer plans offer valuable investment options and pricing that might not be available with an IRA, so it’s important to compare before making a decision.

4. Explore Tax Strategies
Don’t overlook potential tax strategies during a job change. Converting your savings to a Roth IRA could be beneficial; you’ll pay taxes on the conversion now, but future growth and withdrawals will be tax-free. If your income is lower that year, the tax impact will be reduced. Additionally, if you have employer stock in your 401(k), there may be opportunities for tax breaks when you leave the job.

5. Regularly Review Your Accounts
As you transition to new employment, take the time to evaluate and consolidate any old retirement accounts. Keeping track of your investments is essential to ensure they align with your long-term goals and all your accounts are working together in a global allocation.

As we get ready to transition to fall, use this opportunity to evaluate and understand what old accounts you have, if any, and your options to consolidate them. Keeping regular tabs on what is going on with your investments is critical to ensuring they line up with your goals for the future, as your old accounts may not reflect your current risk tolerance and align with your proper allocation. For more personalized advice on managing your old retirement accounts, feel free to reach out to us at info@shermanwealth.com.