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Have you started the new year with a new job and are wondering what to do with your old employer-sponsored retirement plan?
Yahoo Finance senior columnist Kerry Hannon explains four options for how to handle your old 401(k) plan, including rolling it over to an individual retirement account (IRA). Kelly analyzes the pros and cons of each option to help you make the best choice for you personally.
For more expert insights and the latest market trends, click here to watch the full episode of Yahoo Finance Live.
Editor’s note: This article was written by Ike Ntekim.
video transcript
[AUDIO LOGO]
Julie Hyman: If you are starting a new job in the new year, congratulations! But you may be looking at your former employer’s retirement plan and wondering what to do with it. Here, Yahoo Finance reporter Kerry Hannon breaks down your options. So, roll? Do you want to leave it alone? What is your occupation?
Kelly Hannon: [LAUGHS] Well, I’d better do something. Now, basically what happens is you have four options. And the best option is cash.
There are no plans at this time. This isn’t something people should do, but if you don’t have a large account, it’s very tempting, right? But if you cash out before you’re 59 and a half, there’s a 10% penalty. and will have to pay income tax. So that’s clearly something we encourage people not to do.
The second thing you can do is do nothing and just stay with your old employer if they allow it. And if you like your retirement plan options and can track them, that’s fine. The problem is, if you leave it alone with your previous employer, it’s very easy to forget.
A third option is to transfer to your new employer, if it allows such a transfer. We now have a very seamless direct transfer. It’s very important that your money moves directly from one plan to another, and we can set that up for you.
And if they allow you to do that and you like the options that are included in that retirement plan, then by all means, that’s one way to bring it all together. But the final option, which most people recommend these days, is to roll the money over into an individual retirement account, or IRA, at a financial institution. Again, very easy to do. They will do the transfer directly for you.
And this is often very attractive to people because they have all kinds of choices about what they want to invest in. You are actually in control of it. Some of these decisions are yours to make.
And that’s empowering in a way. And if you have, there’s one thing to remember. If you have a Roth 401(k) and want to roll it over to an IRA, that means you need to move it to a Roth IRA. So there’s something to remember.
However, there is one big caveat here. A recent study by the Pew Charitable Trusts found that it is the fees that are incurred. Therefore, if you keep your retirement funds in an employer fund, the fees will be lower than what you would pay for an IRA account. That’s because individual retirement accounts and IRAs pay retail fees and can earn lower institutional fees.
It may not seem like a lot of money now. These are small differences, but they can really add up over time. So it doesn’t mean you shouldn’t roll over, but it should be considered.
– Kelly, as always, thank you for your help and advice. Thank you very much.
Kelly Hannon: thank you.
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