Your retirement savings are important. After all, the money you've saved will likely provide a large part of your income in the future. Managing your savings well will mean more choices for you after you stop working.
Take your time to make good decisions for an old 401(k). Before you make any moves, take stock of your options and choose the best one for you.
- Leave the money in your previous employer's plan
- Roll your savings to your new employer's plan (if permitted)
- Roll your savings to an IRA
- Cash out your savings and close your account
Most people who are still working should eliminate cashing out as a choice: Consider it only if you desperately need money to pay immediate, essential expenses. The reason? Taxes and penalties make cashing out enormously expensive. You'll owe income taxes on withdrawals from pre-tax funds, and typically you must pay an additional 10% penalty if you are under age 59½.
Even if you are already over that age and in retirement, there are still good reasons to keep your retirement savings in a tax-advantaged account—namely the benefit of deferring tax payments and keeping your money invested for your future.
Here are important things to consider as you decide which option may be right for you:
1. What are my investment choices?
Not all retirement accounts provide the same investment options. Some 401(k)s and 403(b)s offer a menu of investments, chosen by the plan's administrator—typically, mutual funds. Some include lower-cost, custom funds not available outside the employer-sponsored plan, and company stock. Plus, some employer-sponsored plans offer a self-directed brokerage option that allows access to brokerage investment options through the plan. Brokerage IRAs typically provide access to a wide variety of mutual funds, exchange-traded funds, stocks, bonds, and other investments. Whatever you decide, make sure that you choose an account option that meets your investment needs.
2. How much are fees and expenses?
Every retirement account—an employer-sponsored plan like a 401(k) or 403(b), or an IRA—has costs, such as administrative fees for maintaining the account, management expenses charged by each investment, and transaction costs associated with trades and other account activity.
After you leave your job, some 401(k) or 403(b) plans may also charge annual or quarterly account recordkeeping fees. On the other hand, large employers might offer institutional-class shares that are less expensive than shares of the same mutual fund in an IRA.
On the IRA side, some providers offer an account with no maintenance fee or annual cost. But there are costs associated with investing in an IRA. You could choose low-cost ETFs, but still be charged a fee for buying and selling them. There may also be costs associated with the purchase of mutual funds. If you're interested in trading stocks, there are costs associated with that as well.
Be sure to examine the total costs associated with each option carefully—even a small difference in fees can have a big impact.
3. What services do I care about?
Many employer-sponsored plans and IRA providers offer online tools that provide education and advice to help you plan and manage your investments. Managed account solutions that provide investment advisory services to help you invest more effectively have also become more common across many employer-sponsored plans and IRA offerings. Other examples of services you may want to consider when deciding what to do with an old 401(k) are check-writing and wire transfers.
4. When do I expect to need the money?
Workplace retirement plans and IRAs may have different rules for withdrawals. For example, sometimes a 401(k) or 403(b) won't be subject to required minimum distributions (RMDs) while you're still working.
- If you plan to continue working after age 70½, you might consider a rollover to your new employer's plan.
- If you're age 55 or older when you leave your job, and you don't plan to go back to work, you might consider leaving the money in your old 401(k), which may allow you to take penalty-free distributions, even if you haven't reached 59½ yet. (Taxes will still apply.) You should contact your plan administrator for rules governing your plan.
5. Is convenience important?
Having your retirement savings in one place could make it easier to track and manage your investments, evaluate fees, and manage distributions in retirement—particularly if you have more than one old workplace retirement account. If you prefer to manage all your finances in one place, you might consider consolidating your savings in a new employer's retirement plan or an IRA.
It's your choice
Everyone has different needs and circumstances. Regardless of your unique situation, make sure to consider costs, investment choices, service, convenience, and other factors, to help determine what may be right for you. Be sure to consider all available options and the applicable fees before moving your retirement assets. And, as always, consult a tax advisor for help with this important decision.
Next steps to consider
If you choose to roll over to a Fidelity IRA, we can help you every step of the way.
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