What to do with an old 401(k)

Consider the pros and cons of the options to help you decide what makes sense for you.

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Key takeaways

Four options for an old 401(k): Keep it with your old employer, roll over the money into an IRA, roll over into a new employer’s plan, or cash out.

Make an informed decision: Find out your 401(k) rules, compare fees and expenses, and consider any potential tax impact.

Changing or leaving a job can be an emotional time. You’re probably excited about a new opportunity—and nervous too. And if you’re retiring, the same can be said. As you say goodbye to your workplace, don’t forget about your 401(k) or 403(b) with that employer. You have several options and it’s an important decision.

Because your 401(k) may be a big chunk 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.

Here are four choices to consider.

1. Keep your 401(k) with your former employer.

Most companies—but not all—allow you to keep your retirement savings in their plans after you leave.

Some benefits:

  • Your money has the chance to continue to grow tax-deferred.
  • You can take penalty-free withdrawals if you leave your job at age 55 or older.  
  • Many offer institutionally priced (i.e., lower-cost) or unique investment options.
  • Federal law provides broad protection against creditors.

But:

  • If you have less than $5,000 in the plan, the money may be automatically distributed to you (or to an IRA established by you). 
  • You’ll no longer be able to contribute to it or, in most cases, take a 401(k) loan.
  • Withdrawal options may be limited. For instance, you may not be able to take a partial withdrawal, you may have to take the entire balance.
2. Roll over the money into an IRA.

You can open an IRA with a bank or brokerage firm, and move, or “roll over” the money into it. Make sure to research fees and expenses when choosing an IRA provider, though. They can really vary.

Some benefits:

  • 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.2
  • You may be able to get a broader range of investment choices.

But:

  • After you reach age 70½, you’ll have to take annual required minimum distributions (RMDs) from a traditional IRA (but not a Roth IRA1) every year, even if you're still working.
  • Federal law offers more protection for money in 401(k) plans than in IRAs. However, some states offer certain creditor protection for IRAs, too.

If you choose to roll over your 401(k) into an IRA or into a new employer's plan, pay close attention to the details. Consider a direct rollover to your new provider. Why? If a check is made payable to you, your employer must withhold 20% of the rolled-over amount for the taxes due to the IRS, even if you roll it over within 60 days. If 20% is withheld, in order to invest your entire balance into your new account 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 may owe more income taxes, as well as a 10% penalty on that money if you're under age 59½.

3. Roll over your 401(k) 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 employer.

Some benefits:

  • Your money has the chance to continue to grow tax deferred.
  • Having only one 401(k) can make it easier to manage your retirement savings.
  • Many plans offer lower-cost or plan-specific investment options.
  • Federal law provides broad protection against creditors. You can defer RMDs even if you're still working after age 70½.3

But:

  • Make sure to understand your new plan rules. 
  • Consider the range of investment options available in the new plan.
4. Cash out.

Taking the money out should be avoided unless the immediate need for cash is critical. The consequences vary depending on your age and tax situation. If you withdraw from your 401(k) before age 59½, the money will generally be subject to both ordinary income taxes and a potential 10% early withdrawal penalty. (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 exception doesn’t apply to assets rolled over to an IRA.)

If you are under age 59½ and absolutely must access the money, you may want to consider withdrawing only what you need until you can find other sources of cash.

Making a decision

It's important to make an informed decision:

  • Find out your 401(k) rules, especially whether you can keep the money in the plan or roll it into a new employer’s plan.
  • Compare the fees and expenses of the investment options in your plan with those in an IRA.
  • Consider the potential tax impact.
  • Think about managing your various accounts.
  • Speak with a financial professional to help evaluate your decision.
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