Four Options for What To Do With Your Old 401(k) Account

One question I hear frequently is “What should I do with my old 401(k) account?”

In this fast paced world we live in, people often change jobs or even careers several times during their lifetimes. When you leave one employer and move to another, it is very important to pay attention to your retirement accounts. The money in your old employer’s retirement plan is YOUR money. Don’t let that portion of your future retirement funds get lost in the shuffle. Here are the four options. You can also learn more by watching my Financial Briefing video “ How to Transfer Your 401(k) or Other Retirement Plan Account”.

Option #1 – Leave the money in the old employer’s plan.
Some employer’s retirement plans will allow you to just leave the money in your old employer’s plan. In some cases, this might be a good idea, at least for the short term.

Option #2 – Move the money to your new employer’s plan
If your new employer has a retirement plan that will accept rollovers from a prior employer’s plan, most of the time this will be your best option. As soon as you are eligible to enroll in your new employer’s retirement plan, go ahead and move your old 401(k) account to your new employer’s plan.

Option #3 – Move the money to an IRA rollover account
If your new employer does not have a retirement plan or the plan will not accept rollovers, your third option is to move the money to an IRA rollover account. This type of account lets you park your retirement savings in a safe place where it is protected from taxes and will continue to grow and compound for you. An IRA rollover account is an Individual Retirement Account designed specifically to accept amounts paid out from employer-sponsored retirement plans.

If you are careful to keep the money in your IRA rollover account segregated from other accounts, you keep your options open. If in the future you once again go to work for an employer who has a retirement plan that will accept rollovers, you can move the money in your IRA rollover account to your new employer’s plan. In that situation, the IRA rollover account will have served as a safe, sensible “parking place” for your hard earned retirement savings.

Of course, you could leave the money in an IRA rollover account and not transfer it to a new employer’s plan. There is nothing wrong with doing this. However, you should consider the investment options available in your IRA rollover account vs. your new employer’s retirement account. Also consider fees and expenses associated with both accounts to see which one offers the best value for you.

Option #4 – Cash in the old 401(k) account and take the money
This option is one that should not really be considered as an option for most people. You could just cash in the old 401(k) account and take the money. The reason you don’t want to just cash in the 401(k) account is that income taxes and tax penalties may take too big a bite out of your savings. Typically, the money in your 401(k) plan has never been taxed. When you make a withdrawal, you are responsible for federal, state, and local income taxes, if applicable, on the amount of money you withdraw. If you are under age 59 ½ at the time of the withdrawal, you could be subject to an extra 10% early withdrawal penalty tax as well. For some people, this could mean giving up nearly 50% of their withdrawal before they get access to what is left. Cashing in a 401(k) account before retirement can be a very expensive proposition.

Whichever option you decide to use, feel free to contact me for guidance.