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When you’re focused on paying off debt or saving an emergency fund, other issues, like what to do with that 401(k) that’s still with your previous employer, fall pretty low on your list of priorities. Actually, old retirement accounts rank fairly low on most folks’ to-do list. Nearly half of American adults who participated in a workplace retirement plan last year said they had at least one other retirement account with a previous employer as well.
If your old 401(k) just sat there gathering dust, it might be fine to leave it where it is. But by ignoring old retirement accounts, you could be losing tens of thousands of dollars thanks to 401(k) fees. For example, according to the U.S. Department of Labor, a $25,000 401(k) balance could grow to $227,000 over 35 years, based on a super-conservative 7% growth rate and a reasonable 0.5% fee. However, many 401(k) plans tack on an additional 1% in administrative fees, and as that compounds over 35 years, it reduces the final balance by 28%—a difference of $64,000!
While you’re working, your employer’s 401(k) match balances out those fees. But paying them after you’ve moved on to a new job only cuts the growth of your retirement. The last thing you need to do when you’re working hard to pay off debt and build an emergency fund is throw away money that can help you secure your financial future.
So, if you have an account with a former employer, here’s our challenge to you: Stop losing money to 401(k) fees and breathe new life into your old retirement account. It’s a simple process, and we’ll even show you how you can get started today!
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1. Get Things Rolling in the Right Direction
When you leave a job, you have the option to roll your 401(k) into an individual retirement arrangement (IRA). Just like your 401(k), an IRA is tax-deferred, which means the money in it grows tax-free. You pay taxes on it only when you withdraw the money.
To avoid taxes and penalties on your rollover, be sure to request a direct rollover. In a direct rollover, your old 401(k) provider writes a check in the amount of your balance payable to the new IRA. The provider can then send the check to you or the new IRA company, and you won’t be penalized.
“The check can be mailed to the client and it won’t be an issue as long as it’s made out to the IRA and not the client,” Brant Spesshardt, an investing advisor from Raleigh, NC, told us.
However, if the 401(k) provider makes the check payable to you, they’ll withhold about 20% for taxes. And, if you don’t deposit that check into an IRA within 60 days, you’ll owe taxes and an early withdrawal penalty.
2. Build Your Balance With Better Funds
With your new IRA up and running, it’s a good idea to update your investments. Now you can choose from thousands of mutual funds instead of the handful of funds included in your old 401(k) plan. “In the 401(k), your former employer chose which funds the plan offered, but with an IRA, you control the choices.” Brant explained. “Out of 8,000 mutual funds, do you really think your former employer is making the best options available?”
With careful shopping you can find high-performing mutual funds that keep expenses down and allow your nest egg to grow along with long-term stock market trends.
As you make your selections, remember that choosing different types of funds will help reduce your risk. Put an equal portion of your retirement in these four categories of funds: growth, growth and income, aggressive growth, and international.
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3. Leave It Alone—But Don’t Neglect It!
Now it’s time to give your new investments room to grow. That means you check in on them from time to time, but you don’t make any big changes, like switching funds or cashing out completely, even when the stock market is swinging up and down.
This can be the toughest part of retirement investing, Brant said. “We all know when we invest it’s wise to buy low and sell high,” he said. “But too often human emotion causes us to do the exact opposite. Greed causes us to buy high and fear causes us to sell low.”
To make money with stock investments like mutual funds, you have to resist those emotions and stick with your investing plan.
4. Get Advice on How to Make the Most of What You’ve Got
Your 401(k) plan probably offered some investing advice to help you manage your account. Opening an IRA doesn’t mean you have to invest on your own. You can get better, more personalized advice by working with an investing professional from the start.
An investing advisor can help you with each step of your rollover and show you how to choose great mutual funds. Together you can also monitor your nest egg’s growth. Once you’re ready to start full-on retirement investing, your advisor can help you set your retirement goals and build a plan to reach them.
This will be a long-term relationship, so it’s important to find an advisor you can trust to answer your questions and give you great advice from day one. Get started on your 401(k) rollover today with an investing professional who has earned Dave’s endorsement as an expert with the heart of a teacher. Taking this initial step will put you ahead of half of Americans who continue to lose money through their old 401(k)s. What are you waiting for?