What Do I Do with My Old 401(k)? 5 Options to Consider
Life gets busy and it’s easy to lose track of your old 401(k). Here are five options to consider for your 401(k) when leaving your company or retiring.
You Have an Old 401(k), Now What??
Most people hold 10-15 jobs with numerous companies throughout their career.
It is estimated that a few trillion dollars are typically left behind in old 401(k) plans that are forgotten about.
When you forget about your old 401(k), you typically don’t know what’s happening within the accounts. “Out of sight, out of mind”.
This includes: what the accounts are invested in, how the investments are performing and the fees that the plan may be imposing on you.
Let’s talk about the five primary options that we all have with our old 401(k)’s when leaving a company or retiring.
1) Leave It Where It Is
Sometimes, the best option is simply leaving your 401(k) with your former employer. If the plan offers strong investment options and low fees, it may make sense to leave it untouched.
However, the big downside is that people often forget about these accounts over time, making it harder to manage their retirement savings effectively.
You may want to consider an options that allows you to better keep on top of the account.
2) Roll It Into Your New Employer’s Plan
If you’re still working and your current job offers a 401(k), 403(b), or similar plan, rolling your old account into it can be a great way to consolidate your retirement savings.
This keeps everything in one place and maintains your ability to make backdoor Roth IRA contributions without triggering the pro-rata rule. The only downside? If your new plan has high fees or poor investment options, it might not be the best choice.
3) Transfer It to an IRA
Moving your old 401(k) into an IRA is another option, especially if you are retired and don’t have an existing plan to roll the funds into.
IRAs offer more investment flexibility, but also greater responsibility to ensure that you are investing in a manner that is suitable and responsible for you. Keep in mind that this move could complicate future backdoor Roth IRA contributions due to the pro-rata rule.
If you plan to take advantage of backdoor Roth strategies, keeping funds in a 401(k) rather than rolling them into an IRA might be a better approach.
4) Convert It to a Roth IRA
You can also roll your old 401(k) into an IRA and then convert it into a Roth IRA. This means you’ll pay taxes upfront, but once the money is in a Roth, it grows tax-free forever.
This can be a smart move in years when your income is lower, but you should plan to pay the taxes from cash savings outside of the account to avoid a 10% penalty and to maximize the benefit of this strategy known as a “Roth IRA conversion”.
5) Cash It Out (Not Recommended)
While withdrawing money from a retirement account prematurely is an option, it’s rarely a good idea.
Cashing out your 401(k) before retirement triggers taxes and an early withdrawal penalty if you’re under 59½, significantly reducing your savings. If possible, avoid this option.
What If You Can’t Find Your Old 401(k)?
Lost track of an old retirement account? The Department of Labor (DOL) has created a new Retirement Savings Lost & Found tool where people can track down old retirement plans that they may have forgotten about.
No matter which option you choose, keeping your retirement savings organized and consolidating accounts when you change jobs can help you manage your investments more effectively.
Have any questions about what you’ve read? Let’s talk about them!
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