Got Old Retirement Accounts? 5 Costly Mistakes to Avoid

Sue B. says, “I’ve had multiple jobs in the past few years and still have a different retirement plan from each one. Should I roll them all over into an IRA for better tracking or just keep them in their separate accounts?”

Thanks for your question, Sue! The average American worker will have more than 11 jobs in their lifetimes, according to the Bureau of Labor Statistics. Chances are many will come with a retirement plan, such as a 401(k), a 403(b), or a Thrift Savings Plan (TSP), if you work for the federal government.

But knowing what to do with an old retirement plan when you change jobs can be confusing. In this post, I’ll review your options and cover five costly mistakes to avoid.

5 Costly Mistakes to Avoid With Old Retirement Accounts

1. Cashing out old account balances. 
2. Forgetting about old plans. 
3. Missing the benefits of consolidation. 
4. Not factoring in your age. 
5. Doing an indirect rollover.

Before making any moves with your retirement account, make sure you understand some of the biggest missteps and how to avoid them.

1. Cashing out old account balances.

By far, the worst mistake you can make with an old retirement account is cashing it out. So I’m glad that Sue didn’t say this option was on her mind.

Many people get lured into cashing out an old retirement plan because it’s tempting and easy to do. Problem is, cashing out is incredibly expensive. If you’re younger than age 59½, taking a retirement distribution means you must pay income tax, plus an additional 10% early withdrawal penalty.

Here’s an example: Let’s say you have a balance in a traditional account of $50,000 and decide to cash out. If you must pay 40% for federal and state tax, plus an additional 10% penalty, you lose 50%. Your $50,000 retirement balance just shrunk to $25,000 in one fell swoop. That makes me want to cry!

If your distribution is large enough, it could also push you into a higher tax bracket for the year, costing you even more in taxes. In addition, you lose all future growth that your account could have earned.

For instance, if you’re 30 years away from retirement, $50,000 could grow to more than $500,000, assuming an 8% annual return. So requesting a lump sum distribution and shutting down your account could...

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