As millennials, we tend to change jobs on average every two years according to most studies. So over the span of a decade, we will have worked for 5 different employers. Now, there is nothing wrong which changing jobs every few years but it does cause for one major financial concern, leaving 401k’s behind! Nowadays most employers will auto-enroll you into their 401k plan because they noticed that auto-enrollment increases employee 401k contributions substantially. With that being said, most employees don’t realize that they’re investing in their 401k so when they leave the firm, they end up leaving the money. Yes, you read correctly, when you leave a job, your 401k does not come with you unless you take it with you. According to the Illinois State Treasury, there is over $2.9 Billion in unclaimed assets for the state of Illinois residents alone. So how do you know if you are one of these residents? Better yet, what steps do you need to take to ensure that your 401k investments transfer with you? All that and more will be discussed in today’s blog.
You Have 4 Options
When leaving a former employer, you have 4 options to choose from when determining what to do with your 401k plan. I will go through each option and give you the pros and cons so that you can make the best decision for you.
1. Leave it there
Leaving it there is the easy thing to do. Your money will stay invested and your 401k provider will still send you monthly/quarterly statements. However, there is one major problem here. If your prior employer decides to switch 401k providers, let’s say from Fidelity to Vanguard, you most likely won’t know about it. The new institution will send you a letter in the mail, but the letter is often overlooked since (to your knowledge) you don’t invest with this institution. Therefore, the next time you decide to log into your account, you will see a zero balance and FREAK OUT! This happened to one of my clients, she went to check her 401k account for the first time in months and “abra kadabra” $25,000 was gone. We had to backtrack and call multiple departments in order to track down her money and it was a stressful process.
2. Rollover into a Traditional IRA
You can open a traditional IRA at your preferred institution and have the old 401k rolled over into your new IRA. If done properly, there is no tax or penalty consequences and you will have full access to your money and it will stay with you no matter where you work. If you call the IRA custodian in which you plan to make put the money, they have a whole department that will handle the rollover for you. The only caveat about this option is that you are now responsible for investing the funds. Are you ready to take on that commitment?
3. Rollover into New Employer 401k
This is often a great option. It’s very simple and you will be able to keep good track of your money since it will all be in one place. Consult with your current HR department and they should be able to guide you through this process. However, this option is not perfect either. Some companies have poor investment options in their 401k. So, if you move your money there you will be stuck with these poor options. In addition, 401k plans are not free, so you will have to pay a fee to keep your money invested there. Most 401k fees are reasonable however, I’ve seen some plans with erroneous fees.
4. Withdraw The Money
I rarely recommend this option because there are taxes and fees associated with a 401k withdrawal. For most individuals this a 401k withdrawal is a bad idea and should be a last resort. If you take a 401k withdrawal, the funds withdrawn will be hit with ordinary income tax and a 10% penalty. For some individuals, the total taxes and fees can add up to 40% of the money withdrawn. Can you imagine taking a $100,000 withdrawal and only truly getting $60,000?
What’s Best For you?
For most people, I recommend that they should rollover the funds into their current employers 401k. I say this because it’s very simple to do, and more importantly, you keep your investments in one place. There’s value in simplicity and I’ve learned that the more simple something is the more likely someone will do it. However, if you are comfortable with investing, it could make sense to rollover the funds into a Traditional IRA and handle your own investments. The more important point is to understand that your 401k doesn’t leave with you unless you move it yourself. I highly recommend that you to search your respective state’s treasury department to inquire if you have unclaimed money in their system. If you reside in Illinois click here to check now!