What to do with an old 401(k)?

Sit? Stay? Rollover? Follow these guidelines for how to approach old retirement accounts

Leaving a job can be tough. You may be leaving behind stability, comfort, some good friends and, importantly, your old 401(k) or other employee-sponsored retirement account. Perhaps you find yourself accumulating retirement accounts and, once a year when you get your statement, you think: "What should I do with my old 401k?" You have options.

You have four options for your old retirement accounts—this goes for 401(k)s, 403(b)s and 457s

1. Leave it where it is with your old employer 

2. Roll it into your new employer's 401(k)

3. Roll it into a rollover IRA

4. Cash it out ... We rarely recommend this one. It generates a tax bill and most likely penalties. It is also counter productive to saving for retirement, so don't start thinking you have extra sushi money!

Leave your old retirement account with your former employer

Sometimes it makes the most sense to leave your old retirement account where it is, rather than rolling it over into your new employer-sponsored retirement plan or into a rollover IRA. Let's chat through the pros and cons of leaving it where it is.

Pros of leaving your retirement account with your former employer

• Your money will continue to grow tax deferred, a benefit for retirement

• The investment options are familiar

• Your ETFs and target date retirement funds could make your investment options more simplified and diversified

• You may incur lower fees

  • If you like your existing investment options, and you have access to the institutional share classes through the 401(k), you may have fewer fees than if you were in the retail share class through a rollover IRA

• Some employer sponsored retirement plans offer low cost or free professional guidance

• Employer-sponsored retirement plans provide broader creditor protection under federal law than an IRA

Cons of leaving your retirement account with your former employer

• A smaller account with an old employer may fall off your radar

• Most employers have minimum balance requirements (typically around $5,000), and if you have less than the minimum balance, your funds may automatically be distributed to you or to an IRA

• You will no longer be able to contribute to this plan and most likely not take a 401(k) loan

• Your withdrawal options may be limited

Roll your old retirement plan into your new employer-sponsored 401(k)

Pros of rolling over your old retirement account into your new 401(k)

• Enjoy all of the benefits of leaving your old retirement account where it is (see above)

• Simplification! You only having to monitor, track, and plan for one account instead of two—or more

• Potential borrowing power though your new 401(k) if your employer allows "in-service" loans. A common borrowing limit is 50 percent of vested balance up to $50,000. Check with your administrator to be sure.

Cons of rolling over your old retirement account into your new 401(k)

• You may leave behind good benefits—like investment options and performance, administration and fund fees, access to professional advice, and any loan options—with your old 401(k)

• Not all employers will accept a rollover from a previous employer’s plan, so be sure to check with your new employer

Things to watch out for when rolling over your old retirement account into your new 401(k)

Contact your new employer's HR department to learn the proper steps to make a "rollover contribution" before you make any moves.

At this time, you'll want to confirm with your new employer's HR department that you are making a "direct rollover." This should be a clear option on your paperwork or online form.  A direct rollover, trustee to trustee (401(k) plan to 401(k) plan) is the most simple and convenient rollover option. This way your former and current 401(k) plan administrators will manage the transaction for you.

Consider an indirect rollover into your new 401(k)

There's a "sort of" rollover option you could consider—but, heads up, it's a bit of a cluster. And, for that reason alone, we don't typically recommend this route.

An "indirect rollover" is when your former employer sends you a check, less 20 percent for taxes. You're responsible for properly depositing the funds on time (within 60 days); otherwise, you'll be subject to a 10 percent penalty, plus taxes.

You must also deposit the 20 percent your employer withheld into your rollover account from excess cash. Otherwise, those funds are considered a distribution, and you'll owe tax and penalties on them. Come tax time, this withholding will be reimbursed.

Since these complexities increase your risk of error and penalties, we recommend direct rollovers whenever possible.

Rollover your old 401(k) into a Rollover IRA

Pros of rolling over your old retirement account into a Rollover IRA

• Your money has the chance to continue to grow tax deferred.

• If you’re under age 59½, you can withdraw money penalty-free for a qualifying first-time home purchase or higher education expenses. (We rarely recommend IRA withdrawals! We're fans of socking away as much as possible for retirement.)

• You'll have a broader range of investment choices as opposed to being limited to the options in your 401(k).

Cons of rolling over your old retirement account into a Rollover IRA

• You may forego benefits of your old 401(k), including the simplicity of target date fund investment options, access to professional advice, loan options, potential lower fees, etc.

• After you reach the IRS required age, you must begin taking your required minimum distribution each year from an IRA, even if you are still working.  If the funds are in a 401(k) and you are still working, you do not need to take distributions. As of 2024, the RMD age is 73, but is subject to change by the IRS.

Things to watch out for when rolling over your old retirement account into a Rollover IRA

Before you make any moves, contact your previous employer's HR department for instructions to make a "direct IRA rollover."

Like the 401(k) direct rollover, the most important thing is to be sure you're making a "direct rollover." This should be a clear option on your paperwork, or online form. A direct rollover, trustee to trustee (in this case, 401k plan to IRA custodian) is the most simple and convenient way to do a rollover, where he old 401k plan administrator will send the rollover directly to the new IRA custodian and handle more of the rollover for you. 

Consider an indirect rollover into your Rollover IRA

An alternative option to rolling over your old 401(k) into your Rollover IRA is an "indirect rollover" (as we mention above).

Since the complexities (listed in the considerations for an indirect rollover to your new 401(k) above) increase your risk of error and penalties, we recommend direct rollovers whenever possible.

(Don't) Cash out your old 401(k)

Pros of cashing out your old 401(k)

• Only cash out your 401(k) plan if you critically need cash. This route is counter to saving for retirement.

Pros of cashing out your old 401(k)

• Consequences can vary depending on your age and your personal tax situation.

• Typically a 401(k) withdraw before age 59½ will be subject to taxes and a potential 10 percent early withdrawal penalty. If you're between the ages of 55-59 1/2 you have some leeway in distributing these funds. 

• Penalties and taxes can be substantial. You are now subject to tax on this distribution and the distribution could push you into a higher income bracket.