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In the excitement of accepting a new job offer, you might not spend a lot of time thinking about what to do with your 401(k) from your old job. However, failing to evaluate your 401(k) rollover options can be a costly mistake.
While it may be tempting to postpone the decision or cash out an old workplace account, knowing the best way to handle an old 401(k) can help you avoid jeopardizing your retirement savings plan or losing your hard-earned money.
You have four main options for what to do with an old 401(k). You can:
Here's how to decide which option is right for you—and how to track down an old 401(k) account.
The simplest option is to leave your retirement money in your former employer's 401(k) plan—if the rules allow you to do so. For example, you may be required to meet a minimum account threshold.
The upsides are that you won't have to take any action and your investments will continue to grow. However, there are some downsides to consider.
As a former employee, you may face higher account management fees. In most cases, you also won't be able to continue contributing to the account and may lose your ability to borrow against your 401(k).
If you tend to change jobs frequently, you could easily lose track of multiple old 401(k)s over time. Plus, having your retirement funds spread across multiple accounts can make it difficult to effectively manage your risk exposure, potentially leaving you overexposed to one stock or one sector.
If you're starting a new job, consider transferring the funds from an old 401(k) into your new employer's plan. Most 401(k) plans allow for transfers from other plans, so with a little paperwork you can move your retirement savings to your new workplace account.
Consolidating accounts means fewer statements to sift through—and potentially lower administrative costs. You may also find it easier to track your saving progress if your retirement funds are in a single account. Keeping them consolidated also ensures you'll have a larger balance to borrow against if you choose to take a loan against your 401(k) in the future.
Make sure to review your new plan carefully because most 401(k)s have a limited menu of investment options. Being able to tailor your investments to your specific goals can be particularly important if you're trying to catch up on retirement savings. Also make sure all funds are fully vested before transferring them, and compare the fees between your old and new plans to ensure you're not paying more in the new account.
For more flexibility and opportunities for personalization, consider rolling your old 401(k) into an IRA. A 401(k) rollover to IRA may be an attractive option for several reasons.
IRAs are known for giving investors a much wider array of choices, from stocks and bonds to mutual funds and exchange-traded funds. Because you'll have the option to choose your IRA investments, you'll have the freedom to build a portfolio that supports your retirement vision.
Some expenses—such as buying your first home or paying for college—may also qualify for penalty-free IRA withdrawals. And if you opt for a Roth IRA, you won't pay taxes on investment growth or a qualified withdrawal—although you'll have to pay taxes if converting a traditional IRA into a Roth IRA. Roth IRAs are also exempt from required minimum distributions, making them a good choice for long-term savers.
If you choose to do a 401(k) rollover to IRA, you'll either do a direct or indirect rollover. For many, a direct rollover—where your 401(k) plan administrator transfers funds straight to your new IRA custodian—is the simplest and safest approach.
With an indirect rollover, you'll receive a check for the account balance, minus a 20% withholding for income tax purposes. You'll be responsible for redepositing your funds within 60 days, including making up the difference of the missing 20%. If you meet this requirement, the 20% withholding will be credited back to you when you file your income tax return. However, if you fail to deposit the funds into an IRA within 60 days, you'll be responsible for income taxes and a 10% early-withdrawal penalty.
Abandoning old retirement accounts is more common than you might think. In fact, an estimated $1.65 trillion in retirement savings has been lost or left behind in old 401(k) accounts, according to a 2023 analysis by Capitalize. Fortunately, there are several ways to find an old 401(k).
Cashing out your 401(k) may sometimes make sense if you're facing a true financial emergency and have exhausted all other options. However, it's important to evaluate the opportunity cost—including using a retirement savings longevity calculator to estimate the lifetime cost of this option. In most cases, taking an early withdrawal may end up doing more harm than good.
Let's say a 25-year-old worker withdraws their 401(k) balance instead of keeping it in the old plan or rolling it over into a new retirement account. Because they're under the age of 59 1/2, they'll have to pay a 10% early-withdrawal penalty plus any deferred income taxes on the distribution.
In addition to losing a large portion of their savings to state and federal taxes and early-withdrawal penalties, they'll miss out on future growth. For example, every $10,000 withdrawn in your 20s could potentially grow to $150,000 or more by age 65 if it remains invested—assuming a 7% average annual return, which is the historical long-term average for the stock market. Of course, actual returns will vary, and this scenario doesn't account for dividend reinvestment.
There's no one-size-fits-all answer for what to do with an old 401(k), but cashing out should be the last resort for most savers. If you value simplicity, transferring the funds to your new employer's plan is worth considering. However, if you want access to more investment options and retirement planning tools, an IRA rollover may be a smart move.
Whatever you do, don't lose track of your retirement nest egg—even if part of it is sitting in an old employer's plan. These savings will play a critical role in your financial future, so make sure they're working hard for you. A financial advisor can help you sort through these complexities and find the best strategy for your situation.
This material is for informational purposes only and is not intended to be an offer, specific investment strategy, recommendation or solicitation to purchase or sell any security or insurance product, and should not be construed as legal, tax or accounting advice. Please consult with your legal or tax advisor regarding the particular facts and circumstances of your situation prior to making any financial decision. While we believe that the information presented is from reliable sources, we do not represent, warrant or guarantee that it is accurate or complete.
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