If you have a 401(k) or 403(b) at a former employer, you’re likely not sure what to do with it. That’s what we found out in a survey of those who made a job transition—almost a third were unsure of what to do with their workplace saving plan.1
Since your 401(k) assets are often a significant portion of your retirement savings, it’s important to weigh the pros and cons of your options—and find the one that makes sense for you.
You generally have four choices:
- Leave assets in a previous employer’s plan
- Move the assets into a Rollover IRA or a Roth IRA
- Roll over the assets to a new employer’s workplace savings plan, if it is allowed
- Cash out, or withdraw the funds
Here are some things to consider about each.
Option: Keep your 401(k) with your former employer
Check your previous employer’s rules for retirement plan assets for former employees. Most, but not all, companies allow you to keep your retirement savings in their plans after you leave. If you have recently been through a drastic change such as a layoff, this may make sense for you. It leaves your money positioned for potential tax-deferred investment growth so you can take time to explore your options.
The benefits of leaving your assets in the old plan may include:
- Penalty-free withdrawals if you leave your job in or after the year you reached age 55 and expect to start taking withdrawals before turning 59½.
- Institutionally priced (i.e., discounted) or special investment options in your old plan that you may not be able to roll into an IRA.
- Money-management services that you'd like to maintain. Note, these services are often limited to the investment options available in the plan.
Some things to consider:
- Typically, employers allow you to keep assets in the plan if the balance is over $5,000. If you have $5,000 or less, you may need to proactively make a choice. Some plans may distribute the proceeds to you automatically.
- You’ll no longer be able to make contributions and, in most cases, take a loan.
- You may have fewer investment options than in an IRA.
- Withdrawal options may be limited. For instance, you may not be able to take a partial withdrawal but instead will have to take the entire amount.
- You may have to pay extra service or administrative fees, and there may be transaction limits.
Option: Roll the assets into an IRA
Rolling your 401(k) assets into an IRA still gives your money the potential to grow tax deferred, as it did in your 401(k). In addition, an IRA often gives you access to more investment options than are typically available in an employer’s plan. For example, if you’re in or nearing retirement, you may want to consider using these assets to generate regular income payments. An IRA rollover provider can often help you create a retirement income strategy as well as offer products that provide guaranteed lifetime income, such as a deferred variable annuity with a guaranteed minimum withdrawal benefit2 that protects your income from market volatility and ensures that you can't outlive it.
If you have other accounts at a financial institution that offers IRAs, you often get combined statements. With that, you get a more complete view of your financial picture, which can make it easier to effectively manage your savings.
Other benefits of rolling over to an IRA may include:
- The option to convert assets to a Roth IRA, which provides federal tax-free withdrawals, providing certain conditions are met.3 Note: Your previous employer may offer a Roth workplace savings plan and allow participants to convert a non-Roth account to an in-plan Roth account.
- Penalty-free withdrawals for first-time home purchase or qualified education expenses if you’re under age 59½.4
- Free one-on-one guidance, help in choosing appropriate investments, and money management services.
But take into consideration that:
- After you reach age 70½, you’re required to take minimum required distributions from an IRA (except for a Roth IRA) every year even if you are still working. If you plan to work after age 70½, rolling over into a new employer's workplace plan may allow you to defer taking distributions.5
- If you need extra protection from creditors outside bankruptcy, federal law offers more protection for assets in workplace retirement plans than in IRAs. However, some states do offer the same or similar protection for IRAs too.
A special case: company stock
If you hold company stock in your workplace savings account, consider the potential impact of Net Unrealized Appreciation (NUA) before electing to make a rollover. Special tax treatment may apply to highly appreciated company stock if you move the stock from your workplace savings account into a regular (taxable) brokerage account rather than rolling the stock into an IRA. You may want to consider asking your financial adviser or tax accountant for help on how a NUA may apply in your situation.
Option: Consolidate your old 401(k) assets into a new employer’s plan
Not all employers will accept a rollover from a previous employer’s plan, so you need to check with your plan administrator. If your employer does, the benefits may include:
- Continuing to position your assets for tax-deferred growth potential.
- Combining accounts into one for easier tracking and management.
- Deferring minimum required distributionsif you are still working after you turn age 70½.5
- Borrowing against your retirement plan assets (not all plans allow loans).
- Investing in lower cost or plan-specific investment options.
But consider this:
- Your 401(k) may have a limited number of investment options.
- You will be subject to the new employer’s plan rules.
Option: Cashing out
Taking the assets out should be a last resort. The consequences vary depending on your age and tax situation, because if you tap your 401(k) account before age 59½, it will generally be subject to both ordinary income taxes and a 10% early withdrawal penalty. In fact, in a Fidelity survey, more than half (55%) who cashed out of a 401(k) said they would not make the same decision again.6
An early withdrawal penalty doesn't apply if you stopped working for your former employer in or after the year you reached age 55, but are not yet age 59½. This doesn’t apply to rollover assets.
If you are under age 55 and absolutely must access the money, you may want to consider withdrawing only what you need until you can find other sources of cash.
A pitfall to avoid
If you choose to roll over your workplace retirement plan assets into an IRA, it is important to pay close attention to the details. To be on the safe side, consider requesting a direct rollover right to your financial institution. It’s also referred to as a trustee-to-trustee rollover and can help ensure you don’t miss any deadlines.
Why? If a check is made payable to you instead, your employer must withhold 20% of the rolled over amount for the IRS, even if you indicate that you intend to roll it over into an IRA within 60 days. If that happens, in order to invest your entire account balance into your new IRA within the 60 days, you’ll have to come up with the 20% that was withheld. If you don’t make up the 20%, it is considered a distribution, and you will also owe a 10% penalty on that money if you are under age 59½. When you file your income tax return, you will receive credit for the 20% withheld by your employer.
If you receive the proceeds check in the financial institution’s name, you must deposit it into a rollover IRA.
Making a decision
It's important to make an informed decision about what may be a significant portion of your savings. As discussed above, your choice will depend on factors such as your former and current employer’s plan rules, as well as your age and financial situation. In addition, you may want to think about your investing preferences, desire to consolidate your assets, and interest in receiving investment guidance. The table below provides a side-by-side comparison of the first three options. And once you make a decision, don’t forget to periodically review these assets, including what they’re invested in as well as the type of account. Your needs may have changed.
Finally, before you make a decision, consider:
- Finding out your workplace savings plan rules, especially if you can keep the assets in the plan or roll them into a new employer’s plan. Every plan has different rules.
- Comparing the underlying fees and expenses of the investment options in your plan to those in an IRA. Also, consider any fees that may be charged by your old plan, such as quarterly administrative fees.
- Evaluating the potential tax impact of any move.
- Assessing your preferences for managing your accounts. For example, you may like having your assets with one provider or with multiple providers.
- Speaking to a financial professional, who can help evaluate your decision based on your complete financial picture.
A Fidelity representative can help you evaluate your situation and assist you in making the most of what you’ve saved:
- Speak to a Fidelity Retirement Representative at 800-343-3548.
- Learn more about Rollover IRAs.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917