If you’re a part of “The Great Resignation,” you may be wondering what to do with your 401k from your old job. Financial expert Carl Carlson, CEO and founder of Carlson Financial, offered some advice on what to do when you move jobs.
Carlson said he prefers to call “The Great Resignation” something different — “The Great Migration” — since most people are getting another job after leaving their previous workplace.
“You’re leaving to go on somewhere else. But what happens is, now [you] have a retirement plan, [you’re] leaving [your] 401k,” Carlson said. “Most businesses, that’s what they have.”
Carlson said your options are different depending on where you work. If you work for the federal government, that’s a TSP; if you work for a nonprofit company, that’s a 403b. All of those options have different names, but are the same thing.
When you leave your job and go somewhere else, you might leave money in your savings plan. What do you do at that point?
“One of the options is, you can leave it in the old 401k,” Carlson said. “If you liked the selection of investments in there, and it’s low fees, and they’ll let you keep it there, that’s an option.”
If your workplace is making you use the money out, you have options as well.
“So if they’re gonna say, ‘Okay, it’s got to be out of here within six months,’ then you’ve got a little bit of time, but you need to get focused on it,” Carlson said. “And probably the next step would be, ‘Alright, let’s move it to my new job.’ So maybe you have a new 401k — what you want to do is, you want to look at the new 401k and see what your investment choices are. If they look good to you, and the fees are low, then maybe you could roll it into your new 401k.”
But what if you don’t like it, and you have all this money tied up?
Carlson said your third choice is to cash in your 401k. He cautioned that it’s not necessarily a good choice, because you’ll be hit with taxes — they have to withhold 20 percent when they send you the money.
“When you leave, if you’re 55 or older, there’s no penalty,” Carlson said. “So most people are used to age 59 and a half, that’s with an IRA. But if you have your money in 401k, you can actually take it out — if you’re over 55 — without the penalty. But if you’re younger than 55, which you might be, then you’re going to get a 10 percent penalty, too, so you don’t want to do that.”
So what’s the best option? Carlson believes the best option is roll it into an IRA.
“And you can do that at Fidelity, Schwab, Vanguard… just roll it into an IRA,” he said. “And then once you have it there, you have all the options for any funds or investments that you want to make. And there’s no fees for most IRAs, you just need to check that out.”
He also said that you should choose a Roth IRA over a regular IRA if you can, but then you have to pay some taxes because that’s considered a conversion.
“So otherwise, you’d just roll it over. And you call it a direct transfer; the main thing is, if it’s a direct transfer, you’re good. There’s no tax, no penalties,” he said.