Don't Leave Them Hangin'​! 4 Options For Your Old Retirement Accounts - 401(k), 403(b), 457, etc.

Review Your Old Retirement Accounts With A CFP®

Know Your Options

Understanding your options when it comes to your previous retirement accounts is imperative to successful growth. Sometimes referred to as, “Orphan Accounts” or accounts that are left behind at a previous employer and receive no real care.

Like anything in life if you pay attention and plan accordingly when adjustments are needed the chance of success greatly increases!

This article is intended for you to become more aware of your options when it comes to your old 401(k), 403(b), employer matching accounts, and other “orphan accounts”.

These 4 options are in no particular order, and I am not recommending doing over the other. This is for general education purposes. Every situation is unique and all inputs must be taken into play before individual recommendations are made.

Option: Leave It With Old Employer

You typically get the option to keep it with your current employer. Some employers may force you to rollover the account (oftentimes if there is a low balance).

The advantage of this is there is not much work to do, except for what you want to do/know how to do. What I mean is you don't need to complete any transfer paperwork.

You will need to be able to select investment options, understand your required rate of return to reach your retirement goal, and also update the investments in the account as the economy changes and more advantageous options appear or you get closer to retirement age.

Another advantage to maintain your current plan and self-managing it is that the fees are often low. Although this is not always the case and would be an important factor in deciding to remain in the plan or rollover the account.

If you choose this option, Target-Date Funds may be your best choice. The advantage of a target date fund is it will automatically become more conservative the closer you are to the year chosen. It will be more aggressive the farther out the year of the fund. For example, a Target Date 2050 should be aggressive versus a Target Date 2020 should be conservative.

The disadvantage is that there is no dynamic, tactical, or strategic investing happening. Also, most plans have a limited set of investment options. See Six Asset Allocation Strategies That Work.

Keep in mind if you leave your account in a specified tax code like a 401(k), there are specific rules compared to an IRA. These are rules you should be aware of.

For Example, the first-time homebuyer exclusion does not apply to distributions from qualified plans like a 401(k).

If you are planning on taking $10,000 from your 401(k) for a first time home purchase it will require you to pay the 10% penalty.

Versus rolling over the 401(k) into a Traditional IRA where there is no 10% penalty for a first-time home purchase!

Keep in mind that if coming from a traditional 401(k)/traditional IRA taxes will be paid in either scenario.

Too many times, I've had a conversation with a prospect that goes like this:

Advisor: "Have you been over your options for your old 401(k) to make sure it will fit your plan?"

Client: "No, I actually just rolled it over into my new 401(k) because that's what they said I could do. Although one of my main goals is to buy a home..."

Advisor: *FACEPALM*

Don't regret any decisions in life because you were uneducated. With modern-day technology and a plethora of financial professionals to help, being uneducated is not an excuse for failure.

Option: Rollover Into New Employers Plan

Some plans may not allow a rollover from a previous employer. The advantages and benefits are pretty similar. You're on your own in regards to understanding the plan and investment options. There may be a 401(k) specialist, but keep in mind that's just what they are.

This is a good point to note that the 401(k) specialist job is not to help you achieve your goals through crafting an efficient financial plan. Typically, the 401(k) specialist job is to enroll and provide direction in relation to the 401(k) plan.

Option: Cash-Out

Put it in your bank. Pay income taxes @ your current income tax rate and penalty {10%} if under 59.5 years old, but gain liquidity of your retirement. If you're in dire need of cash you may take this option. Although, this option is rarely advised.

It is essential that you have emergency funds before investing in retirement. This is protect you're risk of having to cash-out a retirement account due to disability or job loss.

Typically 6 months of expenses is good for the emergency fund if on a single income and 3 months of expenses for 2 sources of income.

Option: Rollover Into an IRA

The advantages of rolling over your previous accounts into an IRA are maintaining tax-deferral, the ability for penalty-free first-time home purchase, and potentially more investment options. Also, if you see the need you can work with a financial professional to answer those unknown questions!

If you want your money to be taken care of, and do not understand how to do it yourself, don’t enjoy taking the time to learn everything, or know your time is better served on learning other things. Then hiring a trusted financial professional may help!

The views depicted in this material are for information purposes only and are not necessarily those of Cetera Investment Services LLC. They should not be considered specific advice or recommendations for any individual. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.