If you’ve left a job and have an old 401(k) account, you may be wondering what your options are for managing that money. As stewards of God’s resources, there are several different approaches you can take, each with its own benefits and drawbacks. We’ll go over some of the most common options and some decisions to think through to help you decide what to do with your old 401(k).
And while I will refer to 401(k), this also applies to those that have any old employer sponsored account, which may include an old 403(b), 457 or 401(k).
To start, what is a 401(k)?
A 401(k) is a tax-advantaged retirement savings plan that is sponsored by an employer. It allows employees to contribute a portion of their pre-tax income to the plan, which can help lower their current taxable income. The funds in the 401(k) account can then be invested in a range of investment options, such as mutual funds, exchange-traded funds (ETFs), and individual stocks and bonds, but the investment options are chosen by your employer.
But, if you’ve left a job and have an old 401(k) account, you have several options for managing that money. Let’s go over some of the most common options and things to consider as you decide what to do with your old 401(k).
Option 1: Do Nothing (i.e. leave it where it is).
One option is to simply leave your old 401(k) where it is. This may be a good choice if you’re happy with the investment options offered by your former employer’s plan and you’re comfortable managing your retirement savings across multiple accounts.
However, there are some potential downsides to leaving your money in an old 401(k) account. For one thing, you won’t be able to make any new contributions to the account, which means your retirement savings won’t continue to grow as quickly as they could. Additionally, you cannot control the investment options, fees and have no say if your employer changes the investments or 401(k) provider.
If you are a minister, this might be an appropriate option if you receive a housing allowance in your 403(b). As long as it remains with your denominational pension board, you can claim the housing allowance in retirement. Keep in mind that if you roll it over to an organization that is not considered a denominational pension board by the IRS, you will lose this benefit. So for ministers, doing nothing might be the most appropriate option.
With special considerations for pastors, it’s important for everyone to evaluate the pros and cons of each option and make the best decision for you and your family.
Option 2: Roll it over to a new 401(k) account.
If you’re starting a new job that offers a 401(k) plan, you may be able to roll your old 401(k) over into the new account. This can be a convenient option, since it allows you to keep all your retirement savings in one place.
However, not all employers allow incoming rollovers, so you’ll need to check with your new employer’s benefits department to see if this is an option for you. Additionally, if the new plan has limited investment options, you may be better off considering other options.
Option 3: Cash out.
My least favorite option is cashing it out, and I would try to avoid cashing out your old 401(k) account. While it may be tempting to take the money and run, cashing out can have serious consequences for your long-term financial security.
For one thing, if you withdraw money from your 401(k) before age 59 ½, you’ll be hit with a 10% penalty on top of any taxes you owe. Additionally, you’ll miss out on the potential for long-term growth that your retirement savings could have enjoyed if you had left them invested.
So, while it may be tempting to cash out your old 401(k), it’s almost always a bad idea. Instead, consider one of the other options we’ve discussed.
Option 4: Roll it over to an IRA
Another option is to roll your old 401(k) over into an individual retirement account (IRA). This is my preferred choice for those that want more control over their investments.
With an IRA, you’ll have access to a wider range of investment options, including individual stocks and bonds, mutual funds, and ETFs. For Christians, there is another consideration that might be important to you, Biblically Responsible Investing. In an IRA, because you have so many investment options, you are able to invest according to your biblical values, and choose stocks, mutual funds or ETFs that align with your beliefs.
If you decide to rollover your IRA, you’ll need to open a new IRA account, if you don’t already have one, with a brokerage firm or other financial institution, and you’ll be responsible for managing your investments on your own.
You also want to make sure that you tell your old 401(k) provider that you are doing a direct rollover. Direct rollover assets are made payable to the IRA custodian and not to you as an individual. If you have not done a rollover before, be sure that you consult with a qualified financial professional if you have questions.
If you’ve had several jobs over the course of your career, you may have retirement savings scattered across multiple 401(k) plans. This can make it difficult to keep track of your investments and ensure that you’re on track for your giving, savings and investing goals.
Rolling your old 401(k) over to an IRA can offer several advantages, including more investment options that align with your values, consolidation of retirement savings, and flexibility in withdrawals.
How to know what’s right for you?
Part of being a good steward is knowing where your money is, how it’s being invested and not letting it fall by the wayside. With special considerations for pastors, it’s important for everyone to evaluate the pros and cons of each option and make the best decision for you and your family. If you have questions about which option might be best for you, consider reaching out to Kingdom Advisor. Kingdom Advisors are financial professionals that integrate their Christian faith into their financial advice. With proper research and planning, and even some guidance from a trusted professional, you can make the most of your retirement savings and maintain a positive outlook for your financial future.
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