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What should I do with my old 401(k)?

Couple asks financial advisor what should I do with my old 401k
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Have you left money in an old 401(k) account? Make sure you know your options so you can put that money to work for you.

1. Leave your 401(k) where it is (if an available option)

You don't have to move your old 401(k) anywhere. It's perfectly fine if the account stays as is, provided your former employer's plan allows it. Many will allow you to stay invested in your old 401(k), provided that you have more than $5,000 invested in the plan.1

PROS: The benefits to this option are that it's simple, the money stays invested, and the account may continue to grow over the years. You can then access the money when you need it in retirement.

CONS: One disadvantage of leaving a 401(k) with an old employer is that you can't contribute to it anymore.

Another downside is that you risk forgetting about that account completely — especially if there are decades between today and your retirement age. And finally, it's worth considering the fees associated with the plan. You may do better rolling it over into a retirement account with lower fees.

If you do leave your 401(k) where it is, keep note of how to access it and where to find it. And make sure your account isn't subject to additional maintenance fees because you no longer work for the company. If you'll be charged more, it might be worth pursuing a different option than leaving your money in that plan.

2. Move your old 401(k) into a Rollover IRA

PROS: Rolling funds over from a former employer's 401(k) to your own Rollover IRA gives you more control over where your funds are invested.

Plus, when you roll over an old 401(k)'s funds into an IRA, you get the added benefit of having your retirement money more organized and consolidated into fewer accounts. That makes tracking — and managing — your wealth much easier to do. And you don't risk forgetting about the funds when the time comes to retire.

CONS: Be mindful of any fees involved with the Rollover IRA, because they may be higher than leaving your funds in your former employer's plan.

3. Transfer funds from a previous employer's 401(k) to your new employer's 401(k)

You also have the option of transferring funds from your previous employer's 401(k) to your new employer's 401(k) — assuming, of course, that your new employer offers a 401(k) plan.

PROS: Your new company's 401(k) provides access to low-cost mutual funds available only in a 401(k) account. In addition, most employers offer company-matching contributions, which aren't available with IRAs.

CONS: You might not want to make this move immediately. Instead, wait until you have a chance to compare your old employer's plan with what your new employer offers. Plus, fee structures vary from one 401(k) to another, so you'll want to take a look at what fees you're paying. Then, you can make an informed decision about leaving the old 401(k) account where it is or rolling it over to your new employer's 401(k).

4. Withdraw the money from your old 401(k)

PROS: Taking the money out of your 401(k) might be an appealing option. After all, it means not worrying about any rollovers or transfers, and you can put that cash exactly where you want to invest it. And if you need the money immediately after suffering a job loss, this can be a particularly tempting.

CONS: If you can afford to keep the money in a tax-sheltered retirement account, that will benefit you the most over time — and your future self will thank you. That's because removing money from your nest egg will set you back from your retirement goals.

However, if you've lost your job and need money to pay the bills, you may decide that your immediate needs take precedence over planning for your retirement.

The other downside of withdrawing money from your 401(k) is cost. Assuming the money is in a traditional, tax-deferred 401(k), you will need to pay income tax on any money you withdraw. Plus, you'll face an additional 10% early withdrawal penalty2  on any funds you take out of the plan before you turn 59 1/2.

Making a decision

Regardless of what path you choose, weigh the pros and cons carefully so you can make the best decision for your financial life and future.

Need additional insights on planning for retirement? Get more tips here.

Important Disclosure Information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. Claire Boyte-White, "What Happens to a 401(k) After You Leave Your Job?" Investopedia. Updated April 17, 2020, accessed June 8, 2020. Back
  2. IRS.gov, "Retirement Topics - Exceptions to Tax on Early Distributions," Updated October 29, 2019, accessed June 8, 2020. Back