What to Do With an Old 401(k)

Lost your job or changing positions? Here’s what you do with that old 401(k).

Changing or losing jobs can be a stressful time. Suddenly, you have to think about finding a new job, editing your resume, networking, and reassessing you finances. This last step is especially important if you have a 401(k) from your previous employer. People in GenY are changing jobs with more frequency than other generations, so managing an old 401(k) is more common than ever.

When you leave a job for any reason, the 401(k) account through your former employer will be deactivated, which typically happens right after the account’s final contribution. Once deactivated, you can either rollover funds into either a new 401(k) or an IRA account.

Neglecting to do either is a missed opportunity, because the money in your old 401(k) could continue growing if you consolidate or rollover.

Here’s how it’s done.

Consolidating to a new 401(k)

If you are starting a new position immediately, you may be able to transfer the funds from your previous 401(k) into the one from your new employer. However, not all plans accept rollovers from old plans, so you’ll have to check with your new employer to see if this is possible. If you can, then you’ll simply contact your old employer for the correct forms to have the money transferred over. Once transferred, it will continue to grow and benefit from any matching programs our new company offers.

401(k) plans do have some limitations that may make an IRA account a better option. To understand the pros and cons of each, see our previous post onsaving for retirement.

How to Rollover into a Fidelity IRA

1. First, you’ll need to open an IRA account unless you already have one. One of the best options is to open a Rollover IRA account, which will allow you to transfer funds without incurring any tax penalties, and your existing assets will remain in your new account tax-deferred. (p) You can also open a Roth IRA or Traditional IRA instead, but you may lose some money to taxes.
2. Once you open your new account, you’ll transfer the funds to your new account. You can request a direct rollover from your former employer’s plan administrator, or choose to have someone from Fidelity contact them for you. Your employer will then either write a check directly to Fidelity, which you can then deposit, or they can wire the funds.
3. Manage your new investment! The process of transferring old funds is now complete, so all you need to do is watch your new account grow. Fidelity can help you create a retirement plan, offering online tools or consultants to help you.

Cashing Out the Account

You do have the option of cashing out the old account, but you will lose the most money this way. You’ll be hit with a 10% early withdrawal penalty, and the remaining money will be taxed as income. There’s no benefit to cashing out early, unless you desperately need the funds. It should be considered a last resort option, especially because it’s fairly simple to either consolidate or rollover your old plans. Consolidating into a new 401(k) or IRA account will protect your assets and allow them to continue growth.

Still want more information about retirement plans? Read our article on Saving for Retirement in Your 20’s, and find out why it’s important to save sooner rather than later.

OnePay is a free bill paying service that consolidates your monthly bills, and helps you pay less. By analyzing your trends and data, we find you ways to save on monthly bills by up to $1000 a year. You can sign up for easy bill pay here, or learn more at justonepay.com. For more on saving money, personal finance, fintech trends, and more, follow us on Twitter: @JustOnePay.