Roll Over 401(k)s
If you leave a job and have a small 401(k) balance you’ll get a check from your plan’s administrator, and it’s tempting to spend it.
If you do, you’ll likely pay a 10% penalty if you’re younger than 59 ½ and don’t roll the amount into a new employer’s 401(k), or into an IRA, within 60 days. Rolling over a 401(k) can be a hassle, but new “auto-portability” services are starting up to more easily roll balances over to new employers.
Roth-ify
If you fit within the income limits to contribute to these accounts, consider opening a Roth account with after-tax money.
The big caveat: more taxable income now. But your tax rate later in life may not actually be lower than it was when you were working — and, of course, tax rates could go up.
Roth IRAs and 401(k)s are a great idea when you’re young, since your tax bracket rises with income. Longer term, Roths are good for diversifying the taxable status of retirement accounts. Retirees who have all their savings in traditional 401(k)s and IRAs, but no Roth account, won’t have much flexibility to manage their income in retirement to try and stay in a lower tax bracket.
Check on Fees
Look over fund expense ratios to make sure they’re not well above average and that cheaper fund options haven’t emerged. Fees paid on funds are a good predictor of future returns, according to Morningstar research. Morningstar’s annual fund fee study gives an idea of what reasonable fees would be on different categories of funds.
Fees on funds may be lower in a 401(k) than for outside accounts, since plan sponsors may negotiate them down. But there are other costs. If you’ve left a company but are keeping your 401(k) there, find out what you’re paying in total fees — administrative fees related to back-office functions such as recordkeeping and custody, as well as expenses on the funds in your account.
One of Frailich’s clients moved money from an old 401(k) with all-in fees of 0.8% over to Vanguard, and now only pays a 0.04% expense ratio. “Literally, the same Vanguard target-date fund cost 20 times as much in this 401(k) versus owning it directly in the IRA” because of the other costs of the client’s plan, said Frailich.
Consider Catch-Ups
If you're 50 or over, make extra catch-up contributions if you can. The additional amount older 401(k) savers can contribute in 2024 is $7,500. That’s on top of the maximum for regular contributions of $23,000 in 2024, so a total of $30,500 in tax-deferred savings.
For traditional IRAs, where the maximum allowed contribution is $7,000, savers 50 and older can put away another $1,000.
This article was provided by Bloomberg News.