- When you change jobs, having a plan for your 401(k) can help ensure that your retirement savings continue to work hard for your future throughout your career.
- As you think about your options, consider investment choice, fees and expenses, services, convenience, and when you'll need the money. You may think of other aspects that are important to you too.
Your retirement savings are important. After all, the money you've saved will likely provide a large part of your income in retirement. Managing your savings well will help you do what you want after you stop working.
Take your time to make good decisions for an old 401(k). Before you make any moves, take stock of your options and choose one that works best for you.
Be sure to note that your plan rules may not allow for every option. For instance, if your 401(k) balance is less than $5,000, leaving the money may not be possible. The employer may roll the account into an IRA on your behalf. Similarly, partial withdrawals may not be allowed. Contact your plan service provider for the options available. But generally, there are 4 options for a 401(k) from an old employer:
- Leave the money in your previous employer's plan, if that is an option.
- Roll your savings to your new employer's plan (if available and if permitted by the new employer).
- Roll your savings to an IRA.
- Cash out your savings and close your account.
Most people should eliminate cashing out as a choice: Consider it only if you desperately need money to pay immediate, essential expenses. The reason? Taxes and penalties make cashing out enormously expensive. You'll owe income taxes on withdrawals from pre-tax funds. (Contributions to a traditional 401(k) are generally made on a pre-tax basis. That means you get the tax break now—your contributions come out of your paycheck pre-tax, which reduces your taxable income.) Plus, when you take money out of the account before age 59½, there is typically an additional 10% penalty.
Even if you are already over that age and in retirement, there are still good reasons to keep your retirement savings in a tax-advantaged account—namely the potential for tax-deferred growth. The ability to pay taxes on contributions and earnings later keeps more money invested and potentially growing for your future.
Here are important things to consider as you decide which option may be right for you:
1. What are my investment choices?
Not all retirement accounts provide the same investment options. Some 401(k)s and 403(b)s offer a menu of investments, chosen by the plan's administrator—typically, mutual funds. Some include lower-cost, custom funds not available outside the employer-sponsored plan, and company stock. Depending on your plan and your goals, it may make sense to keep part of your savings with your previous employer to take advantage of low-cost funds.
For people with company stock that qualifies for net unrealized appreciation treatment, the rollover decision can be very important. Be sure you understand the steps required to qualify for this tax break before you make a move.
Read Viewpoints on Fidelity.com: Make the most of company stock
Some investors may find the investment options in an employer-sponsored plan limiting, but some plans offer a self-directed brokerage option that allows access to brokerage investment options. Of course, in an IRA with a brokerage firm, your investment choices are wide open. These accounts typically provide access to a variety of mutual funds, exchange-traded funds, stocks, bonds, and other investments.
Whatever you decide, make sure that you choose an account option that meets your investment needs.
2. How much are fees and expenses?
Financial services companies have dramatically reduced fees on accounts, investments, and trading in recent years. Evaluating fees charged on your accounts and investments still makes good sense even though the comparison between fees on an IRA and a 401(k) may not be as significant a differentiator as it once was.
After you leave your job, some 401(k) or 403(b) plans may also charge annual or quarterly account recordkeeping fees.
On the IRA side, some providers offer an account with no maintenance fee or annual cost. Be sure to look at the expense ratio on mutual funds or ETFs plus any potential loads—or sales charges. Consider trading commissions as well if you're interested in trading stocks. That's another area where costs have plummeted—at Fidelity you can trade US stocks for $0. Investing through the brokerage window in your 401(k) may or may not come with fees.
3. What services or benefits do I care about?
Many employer-sponsored plans and IRA providers offer online tools that provide education and advice to help you plan and manage your investments. Managed account solutions that provide investment advisory services to help you invest more effectively have also become more common across many employer-sponsored plans and IRA offerings.
Other examples of services you may want to consider when deciding what to do with an old 401(k) are checkwriting and wire transfers. Creditor protection can be a consideration as well. IRAs are protected from creditors up to a certain dollar amount in bankruptcy proceedings but the money in an employer plan is generally shielded from creditors.
4. When do I expect to need the money?
Workplace retirement plans and IRAs may have different rules for withdrawals. For example, sometimes a 401(k) or 403(b) won't be subject to required minimum distributions (RMDs) while you're still working.
- If you plan to continue working after age 72,* you might consider a rollover to your new employer's plan.
- If you're age 55 or older when you leave your job, and you don't plan to go back to work, you might consider leaving the money in your old 401(k), which may allow you to take penalty-free distributions, even if you haven't reached 59½ yet. (Taxes will still apply.) You should contact your plan administrator for rules governing your plan.
5. Is convenience important?
Having your retirement savings in one place could make it easier to track and manage your investments, evaluate fees, and manage distributions in retirement—particularly if you have more than one old workplace retirement account. If you prefer to manage all your finances in one place, you might consider consolidating your savings in a new employer's retirement plan or an IRA.
It's your choice
Everyone has different needs and circumstances. Regardless of your unique situation, make sure to consider costs, investment choices, service, convenience, and other factors, to help determine what may be right for you. Be sure to consider all available options and the applicable fees before moving your retirement assets.
Next steps to consider
Give your money the chance to continue to grow tax-deferred.
If you choose to roll over to a Fidelity IRA, we can help you every step of the way.
Guidance on rolling after-tax 401(k) assets into a Roth IRA.