What to Do with Your Old 401(k)

If you’ve left a job and still have a 401(k) with your former employer, you’re not alone. Many people find themselves unsure of what to do with their old retirement accounts. The good news? You have options—four, to be exact—and each comes with its own advantages and disadvantages.

Option 1: Roll Over to an IRA

The first option is to roll over your 401(k) into an Individual Retirement Account (IRA). This option gives you greater control over your investments and simplification in your financial life.

Pros:

• More Investment Choices: IRAs typically offer a wider range of investment options than a 401(k), including stocks, bonds, mutual funds, and ETFs.
• Flexibility and Management: You can choose an IRA provider that aligns with your financial goals and preferences. From a management perspective, you can self manage an IRA or have your financial advisor manage for you.
• Tax Advantages: Like a 401(k), a traditional IRA allows your investments to grow tax-deferred. If you have Roth funds in your 401(k), you can also roll that into a Roth IRA.
• Organization: One or multiple 401(k)’s can be rolled into one IRA. Consolidating to one IRA offers organization and simplification advantages to your financial life. 

Cons:

• Fees: Depending on the provider or having a financial advisor manage for you, you may encounter higher fees compared to an employer-sponsored 401(k).
• No Loan Option: Unlike some 401(k) plans, IRAs don’t allow you to borrow against your balance.

A rollover IRA is a great option if you’re looking for more control and flexibility in managing your retirement savings.

Option 2: Roll Over Your 401(k) to Your New Employer’s Plan

If you’ve started a new job with a 401(k) plan, rolling your old account into your new employer’s plan is another option.

Pros:

• Consolidation: Having all your retirement savings in one place makes it easier to manage your investments and track your progress.
• Tax-Deferred Growth: Just like leaving your 401(k) with your former employer, your savings will continue to grow tax-deferred.
• Account Balances Stacking: Combining your old 401(k) to your active 401(k) allows for those account balances to stack on top of each other while active contributions happen. This allows for additional compounding.

Cons:

• Plan Limitations: Your new employer’s plan might not offer as good of a match, different vesting periods, or may have higher fees than your old plan.
• Administrative Hassle: Rolling over funds involves paperwork and coordination with both employers. You are the one that will likely need to put the time in to make this rolling over happen.
• Investment Options: The new employer’s plan will have reduced investment options compared to an IRA.

This option is ideal if your new employer’s 401(k) plan offers lower fees, solid investment options, and favorable matching.

Option 3: Leave Your 401(k) With Your Former Employer

The third option is to leave your 401(k) exactly where it is. This is often the easiest route since it requires no immediate action on your part. Here are the pros and cons:

Pros:

• Ease of Transition: By leaving your 401(k) with your former employer, you avoid the hassle of transferring funds or opening a new account.
• Potentially Low Fees: Employer-sponsored 401(k) plans often have lower administrative fees compared to managed individual accounts.
• Tax-Deferred Growth: Your investments will continue to grow on a tax-deferred basis.

Cons:

• Limited Investment Options: You’re restricted to the investment choices offered by the plan, which may not align with your broader financial goals.
• Access Challenges: Managing multiple accounts across different employers can become cumbersome.
• Plan Changes: Your former employer may decide to change plan administrators, polices, or fees which could impact your account negatively.

This option might make sense if you’re happy with the investment options and fees, and you prefer to keep things simple right now.

Option 4: Cash Out Your 401(k)

The final option is to cash out your 401(k). While it might be tempting to access a lump sum of money, this option should generally be considered a last resort.

Pros:

• Immediate Access: You’ll have quick access to your funds, which could be helpful in an emergency.

Cons:

• Taxes and Penalties: Unless you’re 59½ or older, you’ll face a 10% early withdrawal penalty on top of regular income taxes.
• Lost Growth Potential: Cashing out stops your money from growing, which could significantly impact your retirement savings.
• Risk to Long-Term Goals: Using retirement funds for short-term needs can derail your financial plan.

Cashing out might make sense in dire financial emergencies, but for most people, the long-term drawbacks outweigh the short-term benefits.

How to Choose the Right Option for You

When deciding what to do with your old 401(k), consider the following:

• Fees and Investment Options: Compare the fees and investment choices between your old plan, your new employer’s plan, and an IRA.
• Your Financial Goals: Align your decision with your broader financial and retirement goals. If you’re looking for simplicity, consolidating accounts might be best. If stacking your retirement savings together are imperative, combining to one 401(k) is a good option. If flexibility, organization, and more investment options are your priority, an IRA may be the way to go.
• Current Financial Needs: Avoid cashing out unless you have no other options. The tax penalties and long-term impact can be significant.
• Professional Advice: Consult a financial advisor to help ensure you’re making the most informed decision based on your unique circumstances.

Final Thoughts

Your old 401(k) is an important part of your financial future, and what you do with it matters. By understanding your options and weighing the pros and cons, you can make a decision that aligns with your goals and sets you up for long-term success. Whether you choose to leave it, roll it over, or take another route, the key is to act with intention and a clear plan in mind.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.