Entering the new year with a new job and wondering what to do about your old employer's sponsored retirement plan?
Yahoo Finance Senior Columnist Kerry Hannon walks through the four options on how to handle older 401(k) plans, including rolling it over into an Individual Retirement Account (IRA). Kerry breaks down the pros and cons of each option to make the best personal choice.
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Editor's note: This article was written by Eyek Ntekim.
JULIE HYMAN: If you're starting a new job in the new year, congratulations, but you may be taking a look at your old employer's retirement plan and wondering what, if anything, you should do with it. Here with us now to break down your options, Yahoo Finance reporter Kerry Hannon. So do you roll it over? Do you keep it what it is? What do you do?
KERRY HANNON: [LAUGHS] Well, you should do something. Now, essentially, what happens is you have four choices. And the number one choice is to cash it out.
Right now, this is not the plan. This is not what people should do, but it's so tempting when you don't have a big account, right? But if you cash it out before you're 59 and 1/2, you're going to pay a 10% penalty and income tax on that. So that's clearly something that we encourage people not to do.
The second thing you can do is do nothing and just leave it stay at your old employer, if they permit that. And that's OK if you like the choices in that retirement plan and you can keep track of it. The problem is it's super easy to forget about it if you just leave it at your old employer.
Your third option is to move it to your new employer, if they permit those sort of moves. Now, they can make it very seamless for you, a direct transfer. It's very key that the money moves directly from one to the other plan, but they can set that up for you.
And if they allow you to do that and you like the options that are in that retirement plan, by all means, that's one way of putting it all together. But the final option, which is what most people are encouraged to do these days, is to roll it over into an individual retirement account, or an IRA, with a financial institution. Again, they make it super easy for you. They do a direct transfer for you.
And this is often really appealing to people because you have all kinds of choices about what you might want to invest in there. You actually control it yourself. You make some of these decisions.
And it's kind of empowering in a way. And if you have-- one thing to remember there is if you have a Roth 401(k) and you're rolling it over into an IRA, you need to move it to a Roth IRA. So that's something to remember there.
But here's the one big caveat that Pew Charitable Trusts did a study recently that showed that what happens is fees, right? So if you keep your retirement money in an employer fund, it's less expensive in terms of fees than what you're going to pay in your IRA account. And that's because in your individual retirement account, in your IRA, you're going to be paying retail fees, and they are able to get the cheaper, less expensive institutional fees.
Now, it may not seem like a whole lot of money. These are small differences, but over time, it really can add up. So it doesn't mean you shouldn't roll it over, but it's something to consider.
- Kerry, thanks, as always, for your help and advice. We appreciate it.
KERRY HANNON: Thank you.