41% of people, from 2014-2016, cashed out at least part of their 401(k) when leaving a job, and 85% of those people drained the balance entirely! And since most people will change jobs several times before retiring, @RyanCravitz with @CravitzFinancial and @erinkennedy are breaking down the best (and worst!) options when it comes to your old 401(k):
- Cash it out
- Leave it with your old employer.
- Roll your old 401(k) into your new employer's plan
- Roll your 401(k) into an IRA.
Cashing out your old 401(k) is rarely the best option. Not only might you be hit with a heavy tax penalty, you're also greatly reducing any future compound interest. If you've recently changed jobs and would like help figuring out what to do with your old 401(k), please feel free to reach out.
Erin: Ryan, good to see you. Today I have a question that I think a lot of people have right now. What should I do with my old 401(k)? And the reason I'm asking is because 41% of people from 2014 to 2016 cashed out at least part of their 401(k). And of those, 85% drained the entire balance. So we're going to walk through a few options of what to do with the old 401(k), some better than others. The first option, like I said, Ryan, is simply just cashing it out.
Ryan: Yeah, this is definitely an option. It's typically not recommended. I mean, especially if you're under 59 and a half, you've got the 10% penalty that you've got to watch out for. And the other thing is that if you just take that money out, you're going to lose the ability for that money to continue to grow tax deferred for maybe many, many years to come. So this is money that's going to help contribute to your retirement, you don't want to just squander it away.
Erin: Yeah, don't want to squander that compounding too. We love that one. All right. The second option would be then to leave it with your old employer.
Ryan: So this is another option as well. The one challenge that I have seen with this, in fact, I was talking to a lady just the other day, she had three different 401(k)s from all different places and it was hard to just kind of keep organized because people have been changing jobs so often in recent years. So it's an option, you can do it. But you also have to consider too, is that it's hard to keep control of what's happening there and you're also limited with the investment options that the plan has.
Erin: I'm glad you bring that up because I do have a little nugget. 30% of people changed jobs in 2022. So you're right, we're switching jobs a lot these days. It's a lot to keep track of. All right. The third option would be to roll the old 401(k) into a new employer's plan.
Ryan: So yeah, this is another option for you as well, and it's probably a little easier for you to maintain control of it, see what's going on, because it's at your current company's retirement plan. But again, you have to consider the fact that there are going to be limited options within there, usually certain mutual funds that you can invest in. So you have to know that, be okay with that, if you're going to go ahead and make that choice.
Erin: And then the last option, which I'm assuming would be your favorite, would be to roll that money into a traditional IRA.
Ryan: Yeah, this is really the easiest way to do it, I think for most people, because, number one, you can consolidate, like the lady that I was talking about a moment ago. If you have three different 401(k)s, they could all be rolled over into the same IRA. So you can consolidate that, keep control of that, make it so that it's not so hard to keep track of all these different accounts from everywhere. And also within an IRA, you have a lot of different options that are available to you to invest in, far more than you're going to find within a typical 401(k). So whether it's exchange trade of funds, whether it's individual stocks, structured notes, what have you, there's just a lot more options that you have available.
Erin: All right, Ryan. Well, it was helpful to talk this through. I'm sure that it would be helpful to have you walk somebody through rolling that over into an IRA. So if somebody has questions, what's the best way to reach you?
Ryan: You can go to the website, it's CravitzFinancial.com. So again, www.CravitzFinancial.com. Other way is simply to call, so the phone number here is 714-462-9155.
Erin: All right. Ryan, thank you.
Ryan: Thank you.
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