When I was a financial advisor, I met a guy who made a dumbass decision with an old 401(k). I’ll teach you how to do better.

I had stopped by this guy’s house looking for business, and he told me this 401(k) from a previous job had at least $100,000 in it. He wasn’t sure what he was going to do, so I said I would come up with some ideas.

After a few weeks, I drove back to visit. To my dismay, this guy told me he cashed in everything to buy a boat.

Honestly, my first thought was, “Damn, no commissions for me.”

My second thought was, “Why on Earth would you do that?!”

Usually, cashing in a retirement plan means you pay extra income taxes. I don’t know what this guy was making each year, but for tax purposes, it bumped up by $100,000.

I realized I wasn’t going to gain a client (I’m not sure I would have wanted him), so I left.

If you have an old 401(k), here is what you should do next.

Important Note: I am assuming you are under the age of 55.

Part 1: You only have 4 options with an old 401(k).

When it comes to an old 401(k), you only have four options. Choosing the right option for you is in Part 2.

Option 1: Leave It

Depending on how much money is in your account, you might have the option to leave it alone. The money won’t disappear. Any money you contributed is yours. Any money your employer matched and had vested (meaning you worked at your old job long enough to keep the matching funds) is yours.

Option 2: Move It

If your new job has a 401(k) plan, you can likely move the old 401(k) to your new plan. A key difference is the investment options.

More than likely, the old 401(k) company will sell your investments and transfer the cash to your new 401(k). Then you will need to decide how to reinvest your money.

Option 3: Roll It

If you want a retirement plan that isn’t tied to your employer (or your new job doesn’t have a retirement plan), opening an IRA could be an excellent choice.

Moving your money from the old 401(k) to an IRA is usually called a rollover. If you want to avoid most tax consequences, regular 401(k) accounts can go into Traditional IRAs. Roth 401(k) accounts can go into Roth IRAs.

Option 4: Cash It

The final option is to cash out your retirement account and do whatever you would like with the money. You will pay a 10% penalty for cashing out before age 55, and it could get much worse.

Part 2: Here are the best and worst options for you.

Best Options: Move It or Roll It

Almost everyone who has an old 401(k) should move it to their new retirement plan or roll it over to an IRA. These two options keep your money invested for the future. You also avoid paying any extra income taxes or penalties to the IRS.

Moving or rolling your 401(k) money means you don’t forget about it. The funds come with you to your new job or go into your personal IRA. Your life stays simple and manageable.

So-So Option: Leave It

Leaving money in an old 401(k) isn’t a terrible or terrific option. The old account might have lower fees and more exciting investing options. But keeping track of more accounts takes more time and energy. This option is for those of you who are super-organized and don’t mind taking the time to manage your money.

Worst Option: Cash It

Unless you need the money to survive, don’t cash out your old 401(k). There are extra taxes and penalties to pay, and you lose out on the future growth of your investments. Cashing out should be your last resort.

Part 3: No matter what, here are your next 5 steps.

Choosing what you want to do with your old 401(k) may take some time and careful thought. No matter what you decide to do — leave it, move it, roll it, or cash it — these are your next five steps.

Step 1: Start an online filing cabinet.

Finding the information you need about your old 401(k) accounts gets a lot easier with an online filing cabinet. You can find what you need whether you are at home, at work, or away from both.

To keep your financial life organized, I suggest you start an account with Evernote or Google Docs. These are great places to keep emails, websites, and phone numbers of financial institutions. I do not suggest you save usernames, passwords, or account numbers.

Step 2: Create an online account with all your retirement accounts.

Every business that manages retirement accounts has online access. Find the website for you old 401(k) and create an online account. Save the login website to your online filing cabinet.

Step 3: Sign up for electronic statements.

Forwarding snail mail has only failed me twice. I didn’t get the latest issue of Wired, and I was late on a credit card payment. Never again!

Once you have your online account, sign up for electronic statements. You’ll never have to worry about missing a statement in the mail. Plus, when they arrive in your inbox will be a gentle reminder to do something about your old 401(k).

Statements have sensitive information, so keep those in your email or some other place you feel is safe.

Step 4: Figure out how to call someone for help.

Most 401(k) providers have helpful service representatives. They won’t usually help you decide how to invest your money, but they can tell you what forms to fill out, where they are, and what other buttons to press.

Once you have a phone number or name of someone who can help you with the old 401(k), save it in your online filing cabinet.

Step 5: Ask a professional for help.

The IRS has a lot of rules about retirement accounts, and the rules change all the time. To help you make the final decision, find a financial advisor or accountant to walk you through the weeds.

Remember the guy who cashed in his 401(k) to buy a boat? I bet he didn’t ask anyone for help.

Final Words

If you think that cashing in your retirement account is your best bet to pay off debt and raise your credit score, hold on.

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