There are some benefits to each choice, so consider all your options. Keeping track of your retirement accounts is important to understanding whether you are meeting your financial and retirement goals. Learn what rollovers are, why you may want to consider rolling over your old 401(k) account, and why it is a good idea to review your retirement contributions. Reviewing your 401(k) and IRA should not take much time.
Rollover Old Retirement Accounts
While old retirement accounts may be something you forgot after you left the job that gave it to you, a quick review of them may end up saving you money and help you achieve your financial goals. The majority of 401(k) plans operate fairly and efficiently, but checking your old retirement accounts can alert you to any potential problems with your plan, such as:
An inaccurate account balanceInvestments your administrator made without your permissionLosses that can’t be explained by market performance
If there is an issue with your old retirement plan, first contact the plan administrator, or if you need more assistance, call the Employee Benefits Security Administration. In addition to looking for irregularities, examine your contributions, the gains on your contributions, any fees you pay, and the types of investments offered. Switching the types of investments could result in lower fees and could result in additional investment gains for you. Sometimes this is only possible by moving the money from an old retirement account to a different account, such as one offered at a new employer or through a rollover IRA. Consider the following options when reviewing your old 401(k) retirement accounts.
Direct Rollover from Old 401(k) to Your New Account
To do a direct rollover, you first need to set up a retirement account at your new employer. Once this is complete, your old financial institution or retirement plan can transfer the money you had in your old 401(k) into your new retirement plan. No taxes will be withheld from the amount you transfer. The advantage of a direct rollover is that your retirement accounts are consolidated into fewer plans, which may make it easier for you to track. One of the potential drawbacks is your new retirement plan may offer fewer investment choices.
Open a Rollover IRA
If you don’t have a rollover IRA, you can open one up at many financial institutions. A rollover IRA is similar to a traditional or Roth IRA except that you fund it with money from previous retirement accounts. Once you open a rollover IRA account, you can contact your old financial institution or retirement plan and have them directly transfer the money into the rollover IRA. There are many benefits of rolling over your 401(k) into an IRA, such as more investment options, potentially lower fees, and a consolidation of retirement accounts. One of the drawbacks is that sometimes money is withheld if you don’t do the rollover the right way, or the funds may be paid to you rather than into the new rollover IRA and taxes may be withheld.
Leave the Old 401(k) Alone
If you don’t want to consolidate accounts into your new employer’s 401(k) or rollover IRA, you could leave your money in your old 401(k) retirement account. The advantage of keeping your old 401(k) account is that it may provide strong returns with low fees. If you like the investment choices in an old 401(k), it may be another reason to stay in your old 401(k) retirement plan. If not, you can change your investment choices. The drawbacks are you can’t make additional contributions to the account; some employers may charge a higher fee if you are not an active employee; and there are more accounts to manage as they are not consolidated into fewer accounts.
Action to Take: Increase Retirement Account Contributions
A good way to ensure you are on track to reach your financial goals is to consider increasing your retirement contributions. Boosting your contributions isn’t just for those who have old retirement accounts, but for anyone with a retirement account. For example, by increasing contributions when your wage increases and ensuring you take advantage of any employer match, you can dramatically increase the money you will have in retirement. If you choose to increase your contributions, it’s important to know what your contribution limits are.
Retirement Contribution Limits and Rules
The current 401(k) individual contribution limits for 2023 are:
Age 49 and under: $22,500Age 50 and older: $30,000
Your employer can also contribute a limited amount to your 401(k). The total amount that can be contributed to a 401(k) by both you and your employer can’t exceed:
Age 49 and under: $66,000Age 50 and older: $73,500
When To Increase Contributions
The earlier you put money in a retirement account, the better because your money will have more time to compound its returns. For example, if you were to max out your contributions each year at the current limit, then in 30 years, assuming a 7% average annual return, you will end up with more than $2 million dollars. You should also increase contributions if your employer match isn’t maxed out. Matching effectively allows you to receive a 100% return on your money, as you get 100% of it automatically added to your account (subject to the employer’s contribution cap). If you are not currently obtaining the full match from your employer, you are letting some of your employee benefits go unused.
How To Change 401(k) Contributions
You can change your 401(k) contributions in any active plan by contacting the plan administrator or financial institution. Most plans will not allow you to increase your contributions beyond the 2022 contribution limit. You can check with your current plan to ensure that contributions stop once you hit the contribution limit. Contributing more than the contribution limits will lead to taxes.
