You may have left a specific job years ago and it’s nothing but a distant memory, but one question still remains – what to do with the savings in your old 401k? Of course, the answers are multitudinous and will vary with everyone. Yet, considering that the average individual will change jobs numerous times throughout a career, having an answer to the question is imperative. In this article, industry experts provide some suggests of things you can do with an old 401k.
An Online Financial Research Tool
“Our newest product is called Portformer and it is an online financial research tool that helps RIAs save money for their clients by finding low-cost ETF alternatives to existing Mutual Fund investments.
We find that many 401ks, especially ones that were created decades ago, tend to have large allocations to expensive Mutual Funds. We work jointly with individuals and their financial advisors to identify how much money they could save by reducing the fees they are being charged. It isn’t necessarily the fault of the 401k plan provider, the individual or the financial advisor, there is lots of product innovation and cost compression going on right now and we are just trying to create easy tools for individuals and advisors to take advantage of it.”
Sean Kruzel, Founder, Astrocyte Research
Millennium Trust Company
“For my clients (which I have a focus on accredited investors), I recommend between 5-10% of their portfolio in alternative investments – other assets classes than basic stocks and bonds.
Now, there are some options for publicly traded securities that invest in “alternative asset classes”, like commodities and publicly traded REITs. But the better options are not publicly traded.
There are many different trust companies out there that can act as a custodian for a self-directed IRA. I favor using Millennium Trust Company because of how long they’ve been in business, their expertise, and the number of alternative investments they already have approved on their platform through their MAIN program (which stands for Millennium Alternative Investment Network).
You can establish an IRA there, rollover your old 401k, and invest in any number of alternative investments – from non-public traded REITs, to private equity funds, to even buying a rental property that you want to manage yourself.”
Matthew Stewart, President, Wealth Advisor, Forestview Financial Partners, LLC
Startup Capital For A New Business
“One of the least known options for using a 401(k) is to use it as startup capital for a new business, without taking a loan or paying taxes and early distribution penalties. Yes, you can use an IRA or 401(k) to fund a new business or buy an existing business. Those who purchase a franchise often use this type of funding, but it is not limited to franchises. You may see this type of new business funding referred to as a ROBS arrangement or Rollover for Business Startup. For over 15 years, Pension Transfer Advisors has helped entrepreneurs all over the country fund their new business using 401(k) funds. The minimum required for this type of transaction is usually about $50,000 although some smaller amounts may be used.”
Mickey Parker, Chief Operating Officer, Pension Transfer Advisors, LLC
A Few Options
“People have a few options regarding what to do with their old 401(k) from a previous employer. They have the option(s) to:
* Do nothing and leave the 401(k) where it is.
* Transfer their old plan into their current one.
* Roll the funds into an IRA.
* Or cash out the 401(k) and face a large penalty for doing so.
The choice of what to do depends on things like how well their old and new 401(k)s are doing and how much money is in the old 401(k). If there’s only a nominal amount in the old one it may be worth transferring those funds to their new 401(k) plan. Conversely, if the old 401(k) plan is performing well and has a sizeable amount in it, it may be best to leave it as is. The best thing anyone can do is to thoroughly research all available options they have and choose the best course of action based on their findings.”
“You can use your 401k to purchase an investment property. Banks will want your loan to be non-recourse. This means that if you foreclose on the property, the banks won’t come after you financially, but will just take the property back. Your 401k provider will usually cap the amount that you can borrow at a time, which is usually a percentage of your balance. You can only take one loan out per year to buy a rental property. The loan from the 401k provider is set up to pull automatically from your paychecks and is set to be paid back within two years. When you take out a 401k loan, you pay interest to your account, not the 401k provider. This means that you will increase your balance with interest from your loan.”
Shawn Breyer, Owner, Breyer Home Buyers
An Indexed Annuity
“One thing you can do with an old 401K is to move it into an indexed annuity. When done correctly, this will protect your money from ever going down at all, which is incredible, especially when you think about the risk of a recession when you are at or close to retirement age. It will also allow your money to grow at a minimum of 4-6% or more along with market increases depending on which plan and company you go with.”
Stacy Caprio, fiscalnerd.com
“A great option for an old 401k is to invest it with a robo-advisor like Betterment. Once it’s in Betterment, their algorithm takes care of investing it intelligently, and you don’t have to do anything.
I’ve been a Betterment customer since 2015 and I really like it. I’ve used other robo-advisors and online investing tools (Wealthfront, Schwab, and many others) over the years, but have always stuck with Betterment. The interface is extremely user-friendly and easy to use, and it really makes investing easy. My investments have paid off now for years on Betterment. There’s no better service in my opinion that makes investing so easy.
I also like that Betterment allows you to see a full picture of your finances. It allows you to link your financial accounts including bank accounts, as well as loans and liabilities, so you can calculate your net worth in real time, and track your saving progress over time. You can set goals and alerts, and they let you know if you’re missing out on any benefits they provide, like Tax Loss Harvesting, which can reduce your tax liability by automatically selling and re-buying similar securities.”
Logan Abbott, President, Wirefly.com
Roll Into an IRA
“You have a number of options with an old 401(k), the savviest investors will choose to roll it to an IRA. This option gives you a greater level of control and flexibility over your retirement savings – don’t forget that this is YOUR money and not your company’s. 401(k) plans are very constrictive with investment choices and often very expensive (expense ratio fees, administration expenses, etc.), but once your 401(k) balance is transferred to an IRA, you’ll be able to invest in virtually any stocks, bonds, ETFs or mutual funds you want – not just the funds offered by your 401(k). And you’ll be able to continue to make contributions to the account, up to $6,000 to a traditional IRA plus an extra $1,000 if you’re over 50. Contributions may be tax-deductible, depending on your income and whether you and your spouse have the opportunity to participate in a plan at work.”
William F. Davis, Financial Advisor, Ameriprise Financial Services
Rollover Into A Franchise Business
“With many people looking to diversify their 401k investments, using part of an established 401k as a rollover into your own franchise business is an established tax-free way to start your own business. Benefits of this strategy for capitalizing a small business include avoiding debt, diversification from being fully invested in the stock market, creating semi-passive income streams while staying fully employed, and establishing a future path out of corporate America. This method has been fully accepted with the IRS for investing in a franchise business efficiently. There can also be more long term tax savings strategies depending on how it is structured.”
David Busker, CPA, Franchise Consultant, FranchiseVision
The options of things to do with your old 401k are varied. There are many considerations to factor in when deciding what to do with the funds. Incorporate these expert opinions in your decision-making process, and conclude what is the best option for you.