Key Takeaways
- If you have a 401(k) plan from a previous employer, you most likely can roll it over to your current 401(k).
- When it comes to emergency funds, a loan from your 401(k) is a much better option than credit cards or higher interest loans.
- By rolling over your old 401(k), you’ll be playing great defense with your money.
When you’re playing sports, you score on offense, not defense. When it comes to dealing with money, you can actually score on defense, especially when it comes to your 401(k).
If you’re like many people, you’ve switched jobs over the years, and you may have money saved in a 401(k) that’s still sitting with your previous employer’s plan. You get the statements every quarter and think, “I should do something about that,” but you never quite get around to it. Well, let’s walk through why you might want to do it and how it can help you play defense with your money.
You know you need an emergency fund – you’ve certainly heard that before. That’s what’s meant by “defense” when it comes to your money. This emergency fund would cover at least three months’ worth of living expenses. So, if your monthly expenses are $3,000, you’d have $9,000 or more in your emergency fund.
Many people don’t have this, though. However, you might have money sitting in an old 401(k) – money that you contributed, and your previous employer matched. How does this equate to a defensive play?
Well, you can roll 401(k)s over. You can roll them into an IRA, or you can roll them into your current employer’s 401(k). Most plans allow you to do this, and you might want to consider rolling your money into your current 401(k) because most 401(k)s now have a loan feature. You might see where this is going now.
If you find yourself needing an emergency fund, but don’t have enough in your regular savings, you can take a loan out of your 401(k) – up to 50% of what you have in there. And if you don’t have much in your new 401(k) because you haven’t been at your job for very long, you can roll your old 401(k) over and have enough money to meet those emergency needs.
This is a much better alternative to using a credit card that charges 21% interest. Instead, you’ll pay 3% or 4% interest, and it goes back into your own 401(k) account. That’s right – you borrow from your account, and you pay interest into your account, so you’re paying yourself, not someone else.
Now, you might be unsure how to roll over your old 401(k). If you’ve never done this before, just call the number on your quarterly statement. You may be able to accomplish this online, but it’s likely you’ll need to speak with an individual who will walk you through the process and record the conversation. Overall, it’s a pretty simple process.
So, take that old 401(k), roll it over to your new employer’s plan, and set yourself up to play defense. It’s a way to have more money available if you really need it, without getting into bad debt, and hopefully it will make your life a bit easier. Until next time, enjoy.
Gary
If you’d like to read more on this topic, here are a few of Gary’s previous posts that you might enjoy:
Don’t Over-withhold Taxes from Your Paycheck – Build Your 401(k) instead
