“What should I do with my previous 401k?” This is a question I have been asked a few times now and thought I would address it here since I’ve been asked so many times. Chances are that before making your way into dental school you had a job and they offered a 401k (which I’m sure you capitalized on.) But now you are in school, you are not working for that employer anymore and the money seems to be just sitting in the account. No need to worry, your money isn’t stagnant it’s still gaining interest even though you are not contributing to it anymore.
Now that we got that concern out of the way, it is time to address the question “What should I do with my 401k?” Well, there are four options for ya.
1.) Roll over the 401k to an IRA
2.) Roll over the 401k from your old employer to your new one
3.) Leave it were it is
4.) Cash it out
Roll Over To An IRA
I like this option, mainly because I like having control of my money and the fees in an IRA are generally less than those in the 401k. I also like to know what my money is invested in, unlike a 401k, which probably has a select few of investment funds that your employer chose for you. With a rollover IRA, you can invest in practically any stock, bond, or mutual fund you so desire.
Now, I already have an IRA which makes this a reasonable thing to do. If you don’t have an IRA already, it’s probably not an option to roll it over. But yet, it is fairly simple to open a rollover IRA and it is usually free to do so (depends on the broker.)
I highly suggest rolling your 401k into an IRA.
Selecting your own assets shouldn’t intimidate or prevent you from doing this option either. Most brokerage firms have professionals or questionnaires to help you with your asset allocation.
Roll Over To Your New 401K
This probably doesn’t apply to you because you don’t have a job at the moment. But let’s say you are employed, then this is a considerable option for you. Before you roll your old 401k over to your new employer’s 401k double check if this is even a possibility for you. Some 401k plans won’t roll over to your new one. If it can roll over, check the fees that are involved to see if it is worth transferring the money at all.
I like the idea of having the least amount of accounts as possible, this way it’s easier to keep track of my investments. Psychologically it makes me feel better to see a larger number in one account compared to multiple accounts with little numbers (to me at least.)
Leave It Where It Is
This is a reasonable option while in school. There is absolutely nothing wrong with leaving that hard earned money in the 401k provided by your previous employer. Also, leaving it in the account is the best option if you don’t know what the heck to invest in. Chances are your employer simply changed your account into a low-risk profile if it wasn’t set like that already. And, like I mentioned earlier that money is still accruing interest so you don’t need to worry too much.
However, many 401k plan administrators do incorporate fees for keeping a record and managing your account. These fees tend to be higher than those offered by brokerage firms that provide IRA’s. So there is that.
This is a No, No. You shouldn’t even consider cashing out your 401k as an option. When you cash out your 401k you will have to pay federal and state taxes. Not only will you be taxed on the amount you withdraw, but it will be added to any other taxable income you have during the year, which means you could potentially put yourself into a higher tax bracket. Putting yourself in a higher tax bracket is unlikely since you probably don’t have a job while in school. Unless you are working while in school… then go you.
Also, you will face an additional 10% fee for withdrawing your money early (I am assuming most of you are under the age of 59½.) There are exceptions to the fees but we are just going to assume that you don’t apply to any of those exceptions.
Then, the biggest reason why this is a No, No is you are taking away the potential for your money to grow tax-deferred. You are quite literally taking away the possibility of that money to grow 10x its worth over a period of 30 years.
Only for a crazy emergency should you ever consider cashing out the 401k.
As you can see there are multiple options of what to do with your old 401k. Take the time to evaluate your situation and understand the fees that are involved. There are no “wrong” answers (well except for cashing out early). The choice is yours. What will you do with your 401K, would you consider any of these options? Do you even have a 401K? Tell me in the comments below!