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 (assuming you have $5,000 or more in the account, since some employers won't let you leave it if your balance is less).1
PROS: The benefit to this option is 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.
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 the most tempting 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.
CONS: In most cases for most people, this is not a good idea. The main problem: cost. Withdrawing money from your 401(k) means taking some big hits in terms of penalties and fees. First, the IRS will tax any money you withdraw before age 59 1/2 at your regular income tax rate. Plus, you'll face an additional 10% early withdrawal penalty on any funds you take out of the plan.2 This can add up to a massive amount of money owed, not to mention the fact that removing money from your nest egg sets you back from your retirement goals.
While there are always exceptions to the rule, you'll most likely be financially better off if you explore one of the other three options available to you and avoid withdrawing the money from your old 401(k).
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.
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