Do you have an old 401(k) after leaving a job that you are not quite sure what to do with?
Carl Carlson from Carlson & Company Financial Services says to not cash it out ad that it is hardly ever the best option.
Carlson said a lot of people make this mistake because they don’t want to leave anything behind, without understanding that it’s a retirement savings account you can take with you.
If you are under 59.5, you’ll pay a 10% penalty on top of income taxes if you do cash it out.
For many people it makes sense to roll the 401(k) over into an IRA. If you have multiple 401(k)s or IRAs you can consolidate them all into one if you’re looking for simplicity, Carlson said.
Many people wonder if they can just leave the money where it is and if there are there benefits to moving it into an IRA.
Carlson says you can leave it, as many people do, but there are benefits to rolling it over:
- Fees – your 401(k) plan has admin fees, which you could avoid with an IRA. Some 401(k) plans charge an extra maintenance fee once you are no longer an employee with the company.
- Investment options – 401(k) plans generally have a very limited array of investment choices, which oftentimes have high fund expenses. Get total control of your investments in an IRA. Even just half a percent difference in fund fees could be the difference of hundreds of thousands of dollars over time.
- Estate planning – If you pass away with a 401(k), there’s a good chance the account will be paid out in one lump sum to your beneficiaries. This could mean they’ll be hit with a sizable tax bill for the year and the funds are no longer growing tax-deferred. This nuance varies by plan, but with an IRA the beneficiary will usually be able to move it into an inherited IRA or even treat it as their own, allowing them to take distributions over many years.