If you’re in the process of changing jobs, handling your previous employer’s 401(k) may not be high on your priority list. Between migrating work materials, acquainting yourself with new colleagues, and adjusting to a new routine, certain details like your old retirement account might slip your mind – but you may regret neglecting it.

With this in mind, here are some of the options you have for handling 401(k) plans from previous employers.

What Should You Do With Your 401(k)?

The average individual transitions to a new job 12 times in their lifetime, which suggests that when it comes to dealing with an old 401(k), it may not be a matter of if you’ll have to, but when.¹ When you leave a job – whether you’ve switched jobs, quit, or gotten laid off – it’s up to you to determine the best path for your 401(k).

Stick With Your Previous Employer

You may have the option to leave your 401(k) with your previous employer. Doing so could make sense for you if the account manager charges minimal fees and has been delivering strong investment performance, or if you simply have too much money in the account to efficiently redeploy it. Additionally, if your previous employer offered 401(k) contribution matching, you may want to ensure that you’ve fulfilled the vesting requirement (if one exists) so you get access to the full match. Finally, if you own highly appreciative company stock within your old 401(k), keeping that equity in the account could be more tax-efficient than transferring it to a new one. Be sure to collect this information from your plan administrator and consider consulting a tax professional before making your decision.

If you opt to leave your 401(k) with your old employer, you won’t be able to contribute more money to the account but you’ll still need to keep track of it and continue monitoring the investments in it.

Transfer to Your New 401(k) Plan

If you’re interested in consolidating your funds or your new employer’s plan is more appealing, you can consider transferring the contents of your 401(k) to your new employer’s plan. This would cut down on the total number of accounts you have, potentially making it easier for you to keep track of them.

There are two methods of transferring funds between 401(k)s: direct rollover and indirect rollover. A direct rollover is a custodian-to-custodian transaction by which your old plan administrator simply transfers the balance of your old account to your new one. Indirect transfers involve receiving the funds from your old account in the form of a check. These funds must be deposited into a new retirement account within 60 days to avoid incurring income taxes and an additional penalty.

Rollover to an IRA

You’re also able to transfer the contents of your old 401(k) to a traditional or Roth IRA. Doing so has the potential to deliver more control and investment options while possibly lowering your management and administration costs.

You can roll your 401(k) into a traditional IRA within 60 days of leaving your employer without incurring any additional taxes or penalties. If you wish to roll over non-Roth funds into a Roth IRA, you’ll be required to pay income taxes on these funds.

Rolling your funds into an IRA isn’t without its potential pitfalls. These could include less access to lower-cost institutional class shares, fewer legal protections, and an inability to borrow against the value of your account compared to a 401(k). Because many company-sponsored plans allow their participants to start taking withdrawals upon retirement if they’re 55 or older without incurring early-withdrawal penalties, converting to an IRA may mean that you can’t access your retirement funds as early as you would with a 401(k).

Start Taking Distributions or Cash it Out

Of all the options available to you, cashing out your old 401(k) can be the most costly. You can choose to withdraw your funds all at once, in the form of a lump sum, or in smaller increments. If you decide to go this route, you’ll have to pay income taxes on whatever distributions you make in addition to a 10% early withdrawal penalty if you’re under 59½ years old.

Cashing out the balance of your 401(k) also means you’ll ultimately have fewer dollars benefiting from the exclusive tax treatments of a retirement account. Unless you have an urgent cash need, this may not be the strongest course of action.

Handling Your Old 401(k)

You’re likely to change jobs at least once – if not several times – over the course of your working life, so it’s important that you understand what options you have in regard to your 401(k). Whether you’ve quit, changed jobs, or been laid off, you’re going to have a lot to manage during the transition, and having a plan in place for your 401(k) can help keep your retirement plans on track.

Consider consulting with a financial advisor who can help you decide what to do with your old workplace retirement plan.

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.

Endnotes

¹ Kolmar, Chris. “Average Number of Jobs in a Lifetime [2023]: How Many Jobs Does the Average Person Have.” Zippia Average Number of Jobs in a Lifetime 2023 How Many Jobs Does The Average Person Have Comments, January 11, 2023.
https://www.zippia.com/advice/average-number-jobs-in-lifetime/.