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You Left Your Job, Now Take Your 401k With You

401K

I recently left my former employer (more on that later) and one of the first calls I made after making the decision was finding out what I needed to do in order to rollover my old 401k. I wanted to make sure that I had control over my retirement money and my 401k makes up a substantial portion of that. Unfortunately, I am in the minority when it comes to rolling over my old 401k. Statistics show, as of 2010, that 15 million Americans have left behind an old 401k with former employers. I’ve spoken with enough people over the years to know that most are confused by what to do with their old 401k and are surprised to learn that it’s not that difficult to perform a 401k rollover.

A 401k Rollover Can Be an Easy Process

The most common thing I’ve seen with individuals who have left behind an old 401k is that they don’t know what to do. They think they might be taxed, or that a ton of paperwork is required, or that it simply can’t be done. Generally, none of those beliefs are true. As long as the old 401k is going to the 401k at your new employer, or into a Rollover IRA, then it’s generally tax-free. In terms of paperwork, usually a form or two is all that’s required. After you fill out the paperwork, then your work is usually done and the rest of the legwork will take place between your old employer and the final destination of the funds. Another thing to keep in mind is that many 401k plans will require you to move the funds if they’re under $5,000 in value.

Don’t Give Up Control of Your 401k

Each 401k is different, but in general most plans will switch the investments you can be in once you leave the plan. This resulting change can further limit your choices, which gives you as the investor lack of control over that money. Why would I want to leave my money somewhere that won’t allow me to invest it as I see fit, or severely limit what I can invest in? When you look at the possibilities of what you can do elsewhere it does not add up to leave your old 401k with a former employer.

Go on Take the Money and Run

For those who like Classic Rock, like I do, you’ll recognize this line from the popular Steve Miller Band song. This is how we should view our old 401k. I like to think of it as I did not want to be with my former employer any longer, so why should my money be there? The money is yours and you should take control over how it’s invested. As a frugal person, I want to have say over where my money is and how it’s being used.

A 401k Rollover Can Save You Money and Give You More Choices

Like mentioned previously, many plans will change your investment options once you leave the plan. Often those can be mutual funds than can have high fees. By rolling over your old 401k into a self-directed IRA you can significantly lower your investment costs by investing in index funds or solid, dividend-paying stocks. Another nice benefit of rolling over that old 401k is that many brokerages offer a cash incentive based off of the dollar amount you bring over. You also get to benefit from having a broadened selection by which to invest your money, which can also help you further diversify your retirement investing. If putting it in into a self-directed IRA is not an option for you, then look to roll the 401k into your current 401k plan so you can keep the plans together.

If You Can Help it, Don’t Cash Out of Your 401k

Too many times I see people simply cash out their 401k plan. Of course, if you’re in dire need of money you may have no other choice. But, if at all possible, you should try to avoid cashing out of the plan. When you cash out of a 401k, you’re usually going to run into at least a 10-20% (especially if you’re younger than 59 ½) tax hit that will be owed to Uncle Sam. As a frugal person, I hate giving up my money to the government, especially money that I’ve worked hard to save. If retirement is a goal of yours, then it starts by not cashing out of a 401k when you leave a job.

 

Do you have an old 401k out there? If so, how many? I’ve spoken to some who have two or three old 401k’s they have not moved.

 

Photo by: Nicole Schmoll

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally

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29 Comments

  • I do not have an old 401k, but then again I’ve only graduated college a couple years ago. These are good things to keep in mind because the odds of me staying at the same employer for the next forty years are pretty slim.
    DC @ Young Adult Money recently posted…How to Manage and Prioritize Your Time BetterMy Profile

  • John says:

    You bring up a great point DC. The culture has changed to where many people won’t be staying at their employers for decades, which makes rolling over your 401k even more important.

  • Savvy Scot says:

    Hopefully this won’t be an issue for me. I plan to stay with the same employer and retain my final salary pension scheme. I consider my retirement plan to be extremely valuable and important!
    Savvy Scot recently posted…How to Save Money on Razor bladesMy Profile

  • It’s weird to me that something like that isn’t one of the most important things in someone’s mind when they leave a job. I mean, um, helLO? It’s your money, and you don’t know where it is or how you can get it? It’s YOUR money, so figure it all out!
    TB at BlueCollarWorkman recently posted…The Blue Collar View on StarbucksMy Profile

  • It’s shocking to think about how many people just leave this money. Most of it probably comes from being lazy and the rest comes from people being uninformed about their rights when they leave a job.

    • John says:

      I totally agree Sean. It never ceases to amaze me when I talk to people in this situation. I think you hit on the two key issues behind why it happens so often.

  • Veronica Hill says:

    I had a 401k with an old employer at one point, it didn’t have much in there maybe $900 (I was still a student at the time). When it came to switching jobs I just cashed it out, probably not a good choice looking back at it now. I should have saved it and put into another investing vehicle, would have a lot more by now. As a young student I made plenty of mistakes heh.
    Veronica Hill recently posted…Do You Have Too Much Debt?My Profile

  • K Wong says:

    Timely post for me; I just rolled mine over, too! I’d been putting it off for years, and it ended up being a lot easier than I thought. Now, I just have to figure out how/where to invest it. Daunting, but at least I have control. Great post!

  • John says:

    Good for you Kristen. You’re right, it comes down to having control over your own money. Thanks for stopping by!

  • I rolled over my wife’s 401k into a rollover IRA. Very happy we did because the IRA offers so many more investment choices!
    The College Investor recently posted…Can Weyerhaeuser’s Timber Propel it to New Heights?My Profile

  • I think people are intimidated by anything having to do with investing many times and just don’t know how to do a rollover. Amazes me that they just leave it there, but I bet it happens all the time. I’ve never had to deal with that issue, but certainly would if the issue came up.
    Kim@Eyesonthedollar recently posted…Rental Property Series: How Much Did It Cost?My Profile

    • John says:

      I think you’re right on Kim. I think many just for one reason or another don’t know what to do with it and just either leave it or forget about it.

  • Jason Clayton | frugal habits says:

    I decided to roll mine both times to an IRA. I also did a ROTH conversion on a piece of it and paid the taxes at the end of the year. (This is because I believe in the power of the ROTH :))

    Certainly don’t want to cash out, if at all possible.
    Jason Clayton | frugal habits recently posted…Get the Best Deal Possible when Buying a new Car with these Important StepsMy Profile

    • John says:

      That’s a great point Jason, thanks for bringing it up! I love Roth’s as well and are a great tool. I have not converted ours yet, but will definitely be looking to do so in the near future.

  • Terry says:

    John,

    Excellent article.

    In my case, I have set up a self-directed IRA that allows me to use my 401k to invest in real estate. I can buy and sell properties, and like other self-directed IRAs, I don’t pay any taxes until I start removing money from the IRA.
    Terry recently posted…Claiming a Tax Exemption When Selling a Home That is Now a RentalMy Profile

  • John says:

    Thanks Terry. I’ve heard about IRA’s that will allow you to do that. That can be a great way to diversify. From what I’ve heard though, I could be wrong, there are not many institutions that will allow you to hold real estate in an IRA. Thanks for stopping by!

  • Dating myself but Steve Miller’s Take the Money an Run was huge back when I was a college freshman. Saw him here in Chicago in 2010 and he was still awesome. Played 2 straight hours in 90 degree heat at age 66

    I generally agree with you about rolling over an old 401(k) when leaving a job. Perhaps the exception is a situation where say someone is in a plan with a very large corporation and they have access to a solid menu of institutionally priced funds (index and active).

    The most important point that you made was in your last sentence. I encounter folks with 2-3 or more old 401(k)s between them as a couple. I’ve written a couple of articles on this situation which I call financial clutter.
    Roger @ The Chicago Financial Planner recently posted…Friday Finance Links October 19, 2012My Profile

  • John says:

    That’s a great point Roger! I’ve wondered on the percentage of people who have access to something like that when they leave a job. I think it’s somewhat common to change what funds you could access, but should be looked at as a potential possibility.

    I’ve regularly spoken with people just as you have Roger, those that have mulitple 410k’s floating around somewhere. Always surprises me as I am one to want to know where my money is & what it’s in. I love the point of calling it financial clutter!

  • Leaving a 401K with an employer after leaving is not always a bad choice as some plans have excellent choices and low costs. Also in the case of a divorce you want to think carefully before deciding what to do with the money. Leaving the money in the plan if directed by a QDRO will allow you to withdraw funds without the early penalty fee.
    Paul @ The Frugal Toad recently posted…Long-term Energy and Water Efficiency InvestmentsMy Profile

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