For most people, retirement planning is a long-term process that involves setting aside money each month to ensure a comfortable lifestyle in their golden years.
Get the Match
People are often advised to make sure to contribute to their 401k, especially if they have gotten a match from their employers. Doing this increases your retirement contributions at no cost to you. But since 401k’s are managed through your employer when you switch employers, the 401k can get left behind.
However, one financial misstep can significantly impact the amount of money available for retirement: forgetting about an old 401(k).
Here are seven ways leaving behind 401(k) accounts could work against retirement goals and what someone can do to avoid them.
1. Leaving behind 401(k) accounts can make it harder to plan for retirement
Having retirement funds in too many accounts – whether forgotten or known – can make it harder to plan for retirement and know whether savings are on track or not.
One way to combat this is to consolidate retirement accounts into an Individual Retirement Account (IRA). Instead of having to check many old retirement accounts, it’s easy to see retirement progress just by checking the IRA.
2. A forgotten 401(k) can be harder to access and may reduce total retirement savings
If someone changes jobs and leaves their 401(k) with their old employer, there could be significant financial implications. Not only could the money sit uninvested or poorly allocated, but fees could also reduce the account’s value.
Over time, this can negatively impact the account’s balance, leaving less money to support the account holder in retirement. In addition, it may take longer to receive a disbursement when someone is managing the distribution process for multiple accounts. Doing a 401(k) rollover to an IRA each time someone changes employers alleviates this problem because all the retirement funds will be in one place, streamlining the retirement planning and funds withdrawal process.
3. There can be tax implications depending on income level
Many people make pre-tax 401(k) contributions, meaning the taxes are deferred until they begin taking distributions. This is a great benefit of 401(k)s and traditional IRAs; however, if someone is in a lower tax bracket today than they anticipate being in at retirement, a 401(k) could have an unnecessarily larger tax impact down the road.
In such cases, rolling over 401(k) funds into a Roth IRA is one way to alleviate the tax concerns by paying taxes today instead of waiting until retirement. Of course, this depends on someone’s current income and future expectations, which are different for everyone.
4. There could be fewer investment choices in an employer-sponsored 401(k)
Employer-sponsored 401(k) plans usually have fewer investment options, and employees may be limited to pre-selected asset allocations chosen by the company.
Since IRAs aren’t managed by employers, the asset selection tends to be much more diverse. To help account holders, many IRA providers can automatically rebalance the account’s asset allocation to ensure the investments align with long-term financial goals.
5. There can be higher fees in an old 401(k) than in other accounts
A 401(k) account may have higher administrative fees and expenses than an IRA account. That’s because many 401(k) plans only allow investment in mutual funds, which often have higher operating expenses than stocks, ETFs, and other assets available in an IRA.
In an IRA, fees are generally easy to locate and understand, which may not always be the case with a company-sponsored 401(k) plan, where fees can be hidden and eat away at investment growth over time.
6. Forgotten 401(k)s make it harder to keep beneficiary designations up-to-date
401(k) plan beneficiaries often change throughout life. For example, someone signing up for a company 401(k) out of college may list their parents as beneficiaries. But then if that worker gets married and has children, the beneficiaries will change.
Having many retirement accounts could cause issues with beneficiary designations, especially with older 401(k)s that haven’t been reviewed in a long time.
Consolidating old 401(k) plans into an IRA means there’s only one set of beneficiaries that matters: those on the IRA. If the single list of beneficiaries stays updated, it guarantees the account holder’s wishes will be followed.
7. Multiple retirement accounts can increase the risk of compromised accounts or identity theft.
Cybercriminals constantly seek opportunities to infiltrate online accounts and access personal information. Forgotten retirement accounts can be a target for thieves since the account holder may have never logged in to set a secure password, especially if the provider has changed after the account holder switched employers.
The scary part is that fraud could go unnoticed for years until the account holder decides to check back on those funds as they near retirement age.
To safeguard against these fraudulent transactions, account holders should periodically check on all their 401(k) accounts, especially the old ones, and consider a 401(k) rollover each time after changing jobs. This can minimize the chances that an older account will be compromised.
The Bottom Line
These are just a few reasons to consider rolling over a 401(k) into an IRA. Ultimately, everyone’s situation is different. Someone may have an excellent 401(k) and decide to keep their money in that account, while someone else might decide they’re better off rolling over to an IRA. In any case, it’s important to ensure old 401(k)s are working toward retirement goals instead of against them.
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