Getting the most out of your 401k plan

Hi, I’m Tim. I’m writing this mail to you because I’m a little clueless about what to do. Well, it’s been almost a year since I quit my former company and I’m about a join a new one. But, the problem is I still have a 401K with my former employer. The thing is that I’m not interested in cashing out and paying penalties. Is there anything else I can do with the account? What are my options?”

Hi Tim. Thanks for writing in. We completely understand the situation you’re in right now. Changing jobs is exciting, but it also brings in its fair share of confusion and complications. In your case, it’s the good old 401K. Well, Tim, first off, let us remind you that your 401K funds are a very important part of your savings. So, when it comes to handling an old 401K, you have quite a few options. However, you need to see which one suits your requirements the best.

We’ll explain one of these options to you, so that you can have an idea of what needs to be done.

The first option is to leave the 401K active and under the control of your old employer. It’s not very uncommon for some companies to allow this. However, do go through your former employer’s policies on retirement plan assets to make sure you can do this. If they do provide that option, then it’s a fairly wise idea to keep the 401k with them. We say this because there are quite a few advantages. For starters, your investments will enjoy tax-free growth, while giving you time to explore various other options.

If you do retire at the age of 55, then you can start making penalty free withdrawals. Also, you might enjoy the benefits of having specialized or low-cost investment options, which may not be possible if you roll-over your old 401K into an IRA.

If your old 401K comes with certain money management services, then you might want to retain them. However, that is only possible if the 401K remains with your old employer. Lastly, a 401K enjoys more creditor protection than other investment options such as the IRA.

Now, coming to the downside of keeping the 401K with your old employer, there are quite a few. To begin with, you can’t make contributions or get a loan. Then, you’ll have to make do with a limited number of investment options.

Lastly, you may not have too many options for withdrawal. For instance, you might be forced to withdraw your entire investment instead of making a partial withdrawal.

So, Tim, this is just one possibility that we’ve explained to you. However, you do have other options, which include rolling over your old 401K into an IRA or into the new employer’s savings plan. To know more about these options, visit 401K Easy is probably the best 401K resource you can find on the web and we guarantee that you’ll find all your answers here.