That’s the average number of jobs that today’s youngest baby boomers have held. And millennials are headed in that same direction. They’re likely to change jobs four times by age 32. Now, this trend isn’t happening for bad reasons—it’s just the culture we live in. Likely, you’ll change jobs before you retire.
What do you do with your retirement account when you take a job at a different company? People ask me this question everywhere I travel. Here’s the answer.
What Can I Do With an Old 401(k)?
Congratulations on taking control of your financial future. You’re ahead of the game! If you have an old 401(k) from a previous employer, you have four options:
- Leave your 401(k) at your old job (not always possible or a good idea).
- Transfer the money into your new employer’s plan (not always possible).
- Roll over the funds into an IRA.
- Cash out the 401(k) (don’t EVER do this!).
The first two options may not be available to you, and the fourth option is not an option, so mark it off the list. You’ll pay huge tax penalties and lose a chunk of that money.
The best option, then, is to roll over the funds into an IRA. And that’s easy to do.
How to Roll Over a 401(k) Into an IRA
The worst part of putting your 401(k) funds into an IRA is the paperwork. The process itself is not complicated. It requires you to take a few steps:
- Call the 401(k) administrator. Ask them for the forms you’ll need to complete to make the transfer. If you’re not sure who to call, talk to someone in the HR department.
- Open an IRA. If you work with an investing professional, ask them to help you. You can also open an IRA through a bank, mutual fund company, or brokerage firm. You’ll need your Social Security number and driver’s license or other ID. That account will be empty for now. That’s okay.
- Fill out the transfer paperwork from your old company. You’ll need the account information on the new IRA you just opened.
- Request and confirm a direct electronic transfer. That’s what the paperwork from the old 401(k) is for. The money should go from the old 401(k) account to the IRA account. Don’t ever have funds given to you—taxes will eat up that money. The transfer may take a little while, so don’t forget to check back in with your IRA holder after a few days to make sure the money hit the new account.
- Make your investment choices. Your IRA is like a sack that holds your groceries. You still have to choose the groceries—in this case, which mutual funds will be in your IRA. Again, you can talk with your investing pro for help with this.
As soon as possible, start contributing to your new employer’s 401(k) plan, and make sure you get the most out of any employer matching. If there is a waiting period before you can opt in, then contribute to your IRA every month, up to $5,500. When you’re eligible to open a 401(k), start saving there—and make sure the money is automatically withdrawn from your paycheck to the new workplace 401(k).
What About a Roth IRA?
You can also put 401(k) funds into a Roth IRA. The process is the same as with an IRA. However, when you choose a Roth IRA, you’ll have to pay taxes on the 401(k) money because it hasn’t been taxed yet. Remember, a 401(k) is funded from your paycheck before it’s taxed. If you have the cash on hand to pay the taxes, a Roth IRA might be a good option. The money then grows tax-free and you won’t pay taxes on the money when you take it out at retirement.
Every company has different rules about their retirement plans, so it’s important to know your options. Ask questions until you understand the steps. You don’t want to make a mistake because you were too embarrassed to ask. It’s your future, so take control of it!