Last Updated on April 22, 2021
IRA Financial’s Adam Bergman discusses the fact that MILLIONS of Americans have left BILLIONS of dollars of 401(k) funds at previous jobs. Learn how to find and reclaim those funds and what you should do with 401(k) money when you leave a job.
Do you know where your old 401(k) money is? If you’ve ever left a job where you contributed to a retirement plan, what did you do with those funds? Smart savers will take those funds with them, either to a new job or by rolling them over into a personal IRA account. However, millions of people simply forget about them. In this week’s podcast, Mr. Bergman talks about the best way to deal with 401(k) funds when you leave a job. It’s almost always best to take them out of the old plan. Of course, there may be circumstances where you want to leave them where they are. In the end, you must keep track of all your retirement funds, no matter where they are!
Where is Your Old 401(k) Money?
Here in the U.S., it’s not easy to find your old 401(k) money. You can’t just go online and look up your name and it magically appears. Blockchain technology may allow that to happen in the future, but it’s not there yet. Therefore, it’s up to each and every American to keep track of his or her retirement funds. If you think you have 401(k) or other retirement funds at an old job, you must be proactive in getting the information. Contact the HR department or your superiors at the company. But, what if the company is no longer there or can’t find your funds?
According to data from 2015, Americans lost track of $7.7 BILLION of old 401(k) money. When you leave a job, your focus isn’t on your retirement plan. You may be worried about your health care, learning the new job, maybe even planning a move. Many people forget they even have 401(k) funds there, especially if they’ve never contributed to the plan. However, many employers contribute on your behalf. Those funds belong to you and you should have access to them, but only if you remember to ask about them!
What Happens to the Money?
The Department of Labor (DOL) have implanted some rules about unclaimed 401(k) funds. Essentially, if the plan has less than $5,000, the money will get moved to a Safe Harbor IRA program. The IRA custodian will look to find the owners of those funds. More often than not, that money will get depleted by fees to the custodian. On average, the balance drops to zero within nine years.
The employer is responsible for the administration of the 401(k) plan. The more funds in the plan, the higher the cost. Therefore, it behooves them to move the funds out of the plan in most instances.
When you leave a job, whether you know about the retirement plan or not, you should ask first. Simple enough to say “Hey, do I have any retirement funds with you?” If you don’t, you can simply move on to your next job. If you do have old 401(k) money there, you have a few options.
Options When You Leave a Job
You have a few options for what to do with old 401(k) money when you leave a job:
Leave the Funds there
Your first option is to leave the funds there. 98% of the time, this is not the best course of action. It’s better to combine all your plans so you don’t lose track of your funds. Other options generally have better investment opportunities and come with lower fees. Further, when you leave a company, you’re no longer vested in its success. There’s a reason you left the job, so might as well be done with company altogether.
Rollover the Funds
The most widely used (and best) option is the rollover method. Your old 401(k) money can almost always be rolled over into an IRA. Many people utilize an IRA in addition to a workplace plan. If you don’t have one, you can always create a new account to roll the money into. Alternatively, many employer plans will allow you to roll over funds into the plan. Therefore, you can move old 401(k) money into your new job’s 401(k) plan. That way, all your retirement savings can be in one account. Again, the better bet is to put them into an IRA, as you are in control of the investment options, not your employer.
In fact, with the right custodian, you can open a Self-Directed IRA, which opens up your investment options. No longer are you stuck with the usual workplace plan options of stocks, bonds and mutual funds. When you self-direct, you can choose almost any investment you wish, including real estate, precious metals and private businesses!
Other than forgetting about the money, the worst option is the cash out. Once you leave a job, you have the ability to cash out your 401(k) funds. You will pay taxes on the money withdrawn, plus owe penalties if you are under age 59 1/2. Many people mistakenly believe they have to cash out the plan when they leave a job. As mentioned, there are other alternatives. Apart from the taxes and penalties due, that money will no longer be working for you. Remember, the more funds you have put away in a retirement plan, and the longer it stays there, the more earning power it has. Only cash out as a last resort to tide you over after leaving a job.
Whenever you switch jobs, it’s important to keep track of old 401(k) money. Your best bet is to “take it with you.” Retirement planning is much easier when you only have one or two accounts. If you switch jobs multiple times throughout your career, the number of different plans you own can get too much for one person to keep track of. It’s up to you to be proactive in finding these funds, since they do add up over the years. It’s also a good idea to work with a financial planner to make sure you are on the right path.
As always, thanks for listening to Adam Talks. Be sure to check out our SoundCloud page for all of our podcasts!