What to Do With Old 401(k) Plans
You may be one of the many workers who’ve undergone changes with employment in the past few years. The 401(k) account from your previous employer is probably just sitting there when it could do more to grow your retirement savings.
The 401(k) is the most popular employer-sponsored retirement plan among Americans and working professionals.
If you quit or were laid off from your last job, you may be wondering:
What do I do with my old 401(k)?
We've highlighted the steps you should take in regards to your previous 401(k) plans, and how to stay on track towards building a sizable retirement nest egg.
Should You Leave Your 401(k) Alone?
The apathetic approach to the management of your 401(k) from a previous employer is to simply leave it alone.
By keeping it as it is:
The money remains in a tax-advantaged retirement account and continues to grow with the investments you made.
By leaving the old 401(k) alone:
It becomes an extra financial account to manage when you could combine it with other retirement accounts.
It is important to remember, however:
You can no longer contribute to old 401(k) accounts.
But, you do retain the ability to roll it over in the future. Some ex-employers actually want you to leave your 401(k) untouched.
Should You Withdraw From Your 401(k)?
Cashing out your old 401(k) is never a good idea.
A 401(k) is a retirement account meant for - needless to say - retirement.
Taking money out of a 401(k) account before the age of 59½ will result in a 10% early withdrawal penalty.
The 10% tax will not apply if withdrawals before age 59 ½ are made in any of the following situations:
Made to a beneficiary on or after the death of the participant
Made because the participant has a qualifying disability
Made as part of a series of equal payments beginning after separation from service and made at least annually for the life or life expectancy of the participant
Made to a participant after separation from service if the separation occurred during or after the participant reached age 55
Made to an alternate payee under a qualified domestic relations order
Made to a participant for medical care up to the amount allowable as a medical expense deduction
Timely made to reduce excess contributions
Timely made to reduce excess employee or matching employer contributions
Timely made to reduce excess elective deferrals
Made because of an IRS levy on the plan.
Made on account of certain disasters for which IRS relief has been granted
In addition to that:
You are now responsible for the income taxes, since 401(k) contributions are made with pre-tax dollars.
In the end:
You will end up losing over 30% of the money in the 401(k).
Generally, distributions of elective deferrals cannot be made until you reach age 59½, or one of the following occurs:
You die, become disabled, or otherwise have a severance from employment.
Furthermore, you are losing the growth potential of your hard-earned retirement savings by withdrawing it before your time is up.
Should You Roll Over Your 401(k) Into a New 401(k) or IRA?
The ideal route for most people is to roll over your old 401(k) plan into another tax-advantaged retirement plan, preferably a 401(k) with your new employer.
A 401(k) rollover is simple:
It's the addition of the investments in your old 401(k) plan to a new one.
Afterward, your investment choices will be limited by the 401(k) of your new employer.
If you favor the broader investment options of an IRA, you can convert your money into a Rollover IRA, where your money remains tax-deferred.
2022 and 2023 Roth IRA Contribution Limits (based on income)
|Filing status||Modified adjusted gross income in 2022||Contribution limit for 2022||Modified adjusted gross income in 2023||Contribution limit for 2023|
|Single individuals||Less than $129,000||$6,000 ($7,000 if age 50 or over)||Less than $138,000||$6,500 ($7,500 if age 50 or over)|
|$129,000 - $143,999||Partial contribution||$138,000 - $152,999||Partial contribution|
|$144,000 or more||No contributions||$153,000 or more||No contributions|
|Married filing jointly||Less than $204,000||$6,000 ($7,000 if age 50 or over)||Less than $218,000||$6,500 ($7,500 if age 50 or over)|
|$204,000 - $213,999||Partial contribution||$218,000 - $227,999||Partial contribution|
|$214,000 or more||No contributions||$228,000 or more||No contributions|
|Married filing separately||Less than $10,000||Partial contribution||Less than $10,000||Partial contribution|
|More than $10,000||No contributions||More than $10,000||No contributions|
Administrative fees for your 401(k) plan is typically paid by the employer but you may now be responsible for IRA account fees.
Whether you opt to roll over your old 401(k) into another employer retirement plan or into an IRA, you are consolidating your retirement accounts so that money management is easier.
Should You Start Your Own Business With Your 401(k) Funds?
Depending on how long you've worked and how generous your employer has been with their matching program, you may have accumulated a nice balance in your 401(k) retirement plan.
For folks with an entrepreneurial streak, that nest egg can look mighty tempting when opportunities arise.
2022 Tax Bracket
|Marginal Tax Rate||Single||Head of household||Married (filing jointly)||Married (filing separately)|
|37%||Over $539,900||Over $539,900/||Over $628,300||Over $323,925|
If you're thinking about starting a new business and funding it with your 401(k):
Stop and think twice.
Assuming that you have decided not to roll your 401K over into a different plan and you don’t qualify for any IRS Special (Hardship) Case, here are some things to consider before you withdraw the money:
1. Making an early withdrawal will increase your taxable income.
You will need to make sure that (if possible) that Federal and state withholding is taken.
2. You will need to pay an early withdrawal penalty at tax time of 10% of the total.
If you aren’t generating income, it is unlikely that you will have that sum on April 15th. It is probably a good idea that you put that amount aside.
3. You will no longer have an asset accumulating for your retirement years.
What will you do to either replace or restart a fund like this? Depending on how old you are, this may be difficult to impossible to do.
4. You will no longer have a true emergency fund.
If what you are experiencing strikes you as an emergency, then there is no decision to make. But if it is something that you can truly remedy, consider another alternative.
Those four points we detailed above are normally enough to discourage most.
However, if you are still interested in making this withdrawal, there are necessary, slightly more pleasant things to consider:
Consumer debt repayment should be a top priority
There is no reason to carry balances, make monthly debt payments and lose the benefits of your retirement savings.
At the very least, you will need to relieve the stress on your monthly income by repaying your debt.
Live on less
Whether you choose to start a business, go back to school or take a lower paying job, you will need to discipline yourself until your income is at a level where you want it to be.
That means learning to live without little extravagances that you may be used to living on when your salary was continually coming it.
Live on a strict budget
This probably sounds like strange advice when you are looking to take a large lump sum into your bank account.
That is exactly why you need to have a budget that takes into account what your true expenses are.
If you live according to what is in your bank account, you are likely to spend it faster and with less discipline.
Cashing out your 401K is a big decision; however, by the time a person is truly considering whether or not to take this action, they are already decided.
If that is your position, it will benefit you to take a look at this list on a regular basis, and remember to start working quickly to rebuild as soon as you can.