U.S. Markets open in 8 hrs 49 mins

Two Minute Money: How do you rollover an old 401K?

Welcome to Two Minute Money, Yahoo Finance’s new personal finance series offering quick explanations for some of the most important questions involving your money.

Do you have an old 401K lying around? Once you leave a job, you can no longer contribute to the fund, so the account just sits there. And it can seem daunting to try to do anything about it.

You can leave it alone, but you can also roll it over into a new account. Rolling a 401K into an IRA gives you complete control over your money. IRAs tend to offer more selection for your investment compared to 401Ks, which are typically more strictly managed, and several IRA accounts have very low fees.

If the math adds up and you decide an IRA is right for you, the rollover process has four steps:

  • First, decide whether to use a traditional or Roth IRA. if you decide to roll into a Roth IRA, you’ll owe taxes on the total amount rolled over.
  • Next, choose a brokerage and open a rollover IRA.
  • Third, ask your 401K provider for  a “direct rollover.” It’s very important you use those specific words. This tells your old 401K  provider to cut a check directly to your new IRA provider.
  • Finally, make your investment choices.
  • Now all you need to do is close your old 401K, and you’re done.
The magic words are “direct rollover.”

Other options

But converting to a rollover IRA is only one option. If keeping your retirement account in just one place is important to you, you can rollover your old job’s 401K into your new job’s 401K. The main thing is to make sure you set up your new account as soon as you can. Most companies will give you the information you need.

Compare the fees from your old account to your new account. Small fees could compound over the life of your investment, leading to big losses. make sure the move is worth it.

The worst choice

There is another option, but it’s widely regarded as the worst choice — you could cash out. One in five Fidelity 401K holders cash out at an average of $12,000.

It seems like a lot of cash, but you’ll be hit with taxes and penalties on that money. Plus, you’re basically stealing from your future self. Whatever you do with your old 401K, make sure it stays in a retirement account so you can enjoy your golden years.

More from Two Minute Money:

How to fill out your W-4
Easy tips that wills save you $100 month
How secured credit cards work
What is disability insurance?