One of the common threads of a mobile workforce is that many individuals who leave their jobs are faced with a decision about what to do with their 401(k) account.
Individuals have four choices with the 401(k) account they accrued at a previous employer.
Choice 1: Leave It with Your Previous Employer
You may choose to do nothing and leave your account in your previous employer's 401(k) plan. However, if your account balance is under a certain amount, be aware that your ex-employer may elect to distribute the funds to you.
Low-cost investment options
Maintain certain creditor protections unique to qualified retirement plans
Retain the ability to borrow from it if the plan allows loans to ex-employees
Individuals can become disconnected from the old account and pay less attention to ongoing management
Choice 2: Transfer to Your New Employer's 401(k) Plan
Provided your current employer's 401(k) accepts the transfer of assets from a pre-existing 401(k), you may want to consider moving these assets to your new plan.
Convenience of consolidating your assets
Retain strong creditor protections
Keep access to funds via the plan's loan feature
Make a full break with your former employer
Choice 3: Roll Over Assets to a Traditional IRA
Another choice is to roll assets over into a new or existing traditional IRA. It's possible that a traditional IRA may provide some investment choices that may not exist in your new 401(k) plan.
Wider range of investment options
Consolidate multiple old 401(k)s into one account
Ongoing professional management
May have less creditor protection than a 401(k)
Loss of access to funds via a 401(k) loan feature
Important: Don't feel rushed into making a decision. You have time to consider your choices and may want to seek professional guidance. Also, be aware of the Rule of 55 and NUA strategies before rolling over.
Choice 4: Cash Out the Account
The last choice is to simply cash out of the account. However, if you choose to cash out, you may face significant costs:
Pay ordinary income tax on the entire balance
10% early withdrawal penalty if under age 59½
Employers may withhold 20% to prepay taxes
The True Cost of Cashing Out
Taking $10,000 out of a 401(k) instead of rolling it into an account earning an average of 8% in tax-deferred earnings could leave you $100,000 short after 30 years.
Quick Comparison
| Option | Pros | Cons |
|---|---|---|
| Leave with Former Employer | Keep investments, creditor protection, loan access | Easy to forget, less attention |
| Transfer to New Employer | Consolidation, creditor protection, loan access | Limited to new plan's options |
| Roll to Traditional IRA | More investment options, consolidation | Less creditor protection, no loans, Rule of 55 lost |
| Cash Out | Immediate access to funds | Taxes, penalties, lost growth potential |
The Bottom Line
Think carefully before deciding what to do with your 401(k). Each option has trade-offs, and the right choice depends on your specific situation, tax bracket, and retirement timeline.
Disclosures: In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73. Withdrawals are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. A 401(k) loan not paid is deemed a distribution, subject to income taxes and a 10% tax penalty if under 59½. This is general information and not intended as tax or legal advice. Please consult professionals for your individual situation.