Q. I have an old 401k account with a prior employer. Should I leave it there or move it?
As a general rule, I recommend transferring an old 401k account to an Individual Retirement Account (IRA). The unfortunate truth is that the investment options in many 401k plans leave much to be desired. Typical 401k accounts have limited investment options which often come with high expenses and fees. Every dollar in expenses that you incur today is one less dollar that will be left to compound over time.
Consolidating old 401k accounts into an IRA will also make tracking and re-balancing your investments easier as well.
Choose a financial services company that offers low-cost index funds, such as Vanguard, Fidelity or Schwab. Once you’ve decided the custodian of your IRA, they will assist you in doing a “trustee-to-trustee” transfer of your 401k to an IRA. Taking physical possession of the funds, even temporarily, can open you up to potential taxes and fees if the rules aren’t followed closely.
As with most rules, there can be some exceptions. A few examples would be if you plan to retire early, do Roth conversions in the future, are concerned about additional creditor protection, or if you own appreciated company stock within your 401k. It’s been my experience that exceptions don’t apply very often. However, you should consult your investment advisor if one or more may pertain to your situation.
The worst thing you can do is cash out the old 401k! Even a small balance can compound into a nice nest egg years (or decades) down the road. When you look at the 401k balance from a previous employer, don’t think about a new boat or an extra week at the beach next summer. Think instead about transferring it to an IRA. It may not be as much fun, but the older version of you will thank you for it!
John is a CPA and personal finance coach. Email your questions to firstname.lastname@example.org.
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