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401(k) Held at a Former Employer? Know Your Alternatives

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May 24, 2017
401(k) Held at a Former Employer? Know Your Alternatives

One of the things you have to consider when changing jobs or nearing retirement is what to do with your old workplace savings plan. If you’re well into your working career, or maybe even close to retiring—you’ve likely changed jobs at least one time in your career.

The more frequently you’ve changed jobs, the greater the chance that you have an old 401(k) with a former employer, maybe even one you forgot about over time. If you suspect you might have a lost 401(k), first look through old statements. You can also search online for unclaimed retirement benefits, but perhaps the best way to find an old 401(k) is the direct approach—contact the HR department at your former company to see if they can help. If the company was sold or merged, contact the current parent company, as your old 401(k) was likely merged into the new entity’s 401(k) plan.

Consider All Your Options

Once you locate your old 401(k) plan, it’s time to think of ways you can put it to work for your retirement goals. For many investors, 401(k) savings, including the ones they accumulated at past jobs, end up forming a major part of their retirement funds, so it’s important to make a wise choice of what to do with this money. Some questions you might ask yourself as you go through this process include:

  • Leave it with your former employer
  • Roll it into your current employer’s plan
  • Roll it into an Individual Retirement Account (IRA) 
  • Cash it out

It’s important to understand the impact each choice has on your investment. Questions to ask yourself as you go through this process might be:

  • What are the fees and expenses in your old 401(k) compared to those you might pay if you roll it over into an IRA or into a new employer’s plan? Fees could include investment-related fees, sales loads, commissions, plan fees, administrative fees, or others.
  • What range of investment choices does your new employer’s 401(k) offer? Are these investment options suitable for your goals?
  • How much choice does the new employer’s plan give you to select and manage investments?
  • What are the potential penalties if you were to withdraw money early from the 401(k) or IRA you choose?
  • Does the new plan offer services like investor advice and investment planning tools?
  • Do you think you’ll work after age 70 ½? Once you reach that age, the rules for both plans and IRAs require you to periodically take a Required Minimum Distribution. However, if you’re still working at age 70 ½, you generally aren’t required to make required minimum distributions from your current employer’s plan.

Examine Your Choices

After exploring the initial questions regarding what to do with your old 401(k), it’s time to examine the advantages and disadvantages of each of your choices. Refer to the TD Ameritrade Rollover IRA page for a more complete list of the advantages and disadvantages regarding each choice.

Leaving it where it is. Leaving your 401(k) with your former employer can allow your money to grow tax-deferred but you won’t be able to continue making contributions. Additionally, you may be able to take penalty-free withdrawals if you leave your employer between age 55 and 59½, and may have access to low-cost, institutional investments.

A possible drawback to this plan is that it can be difficult to keep track of multiple accounts at different companies. Some people work in five or more jobs during their careers, so you should consider if you want to juggle five different 401(k) accounts. Additionally, your former employer might pass along certain plan administration or record keeping fees, and if they do you could be burdened with those. 

Rolling it into your current employer’s plan. You may be able to roll the old account into your current employer’s 401(k). Any earnings will continue to accrue tax-deferred until withdrawn. Plan investment choices may include low-cost, institutional-class products, which could mean you end up with more money accumulating in your account and less going into fees. The other advantage of rolling into the new plan is that if you end up needing the money before you turn 59 ½, you may be able to take penalty free withdrawals from a 401(k) between the ages of 55 and 59 ½. Generally, you wouldn’t be able to do that with an IRA.

Before you decide to roll your money into a new 401(k) plan, understand your investment choices will be limited to those in the new plan, and you may incur tax consequences if you hold appreciated stock in your former employer’s plan account.

Rolling it into an IRA. Another option is to take your old plan, or plans, and roll them over into an IRA. As with a 401(k), your funds will continue to grow tax-deferred until withdrawn and you may be able to make new contributions within normal IRA limits to continue to grow savings. Plus, account maintenance fees are usually minimal. However, unlike most 401(k) plans, with an IRA you’ll have a much wider variety of investment choices, including mutual funds, ETFs, stocks, bonds, options, and more. And you can usually take penalty-free withdrawals before age 59 ½ to cover such things as education expenses, health insurance premiums, or a first-time home purchase.

On the other hand, you may incur trading-related expenses, including commissions, and you may not have access to the exact same investments you had in your employer’s plan. Additionally, the IRA wouldn’t generally allow you to withdraw funds penalty-free between the ages of 55 and 59 ½, as you might be able to do with a 401(k).

Cashing out. Of the four, cashing out may be the least desirable, for several reasons.

If you’ve contributed to a former employer’s 401(k), it may be appealing to use your savings to pay off debt or fund an upcoming purchase like a down payment on a car or home. However, the long-term impact of cashing out your 401(k) can be quite significant.  

Fees, taxes and penalties can considerably reduce the amount of money you will receive from cashing out your 401(k). The amount you cash out will be subject to a mandatory 20% withholding for federal income tax, and there is an additional 10% early withdrawal penalty if you are under age 59 ½. You may also be responsible for ordinary income tax on the full amount of your distribution, as well as state and local taxes depending on where you live. 

More importantly, a major benefit of a tax-advantaged 401k account is that it allows your pretax contributions to continue growing tax-deferred. Over time, your earnings can generate their own earnings, potentially helping you accumulate even more money. Alternatively, if you cash out your 401(k), you can’t make up for the power of earnings lost over time.

You have choices when it comes to your old 401(k), and each has its merits. Consider the options, and choose the one that helps you make the most of your savings for retirement. And should you choose to roll your accounts into an IRA, TD Ameritrade can help you through the process, from goal planning, helping you with the paperwork, and even contacting your current plan administrators, to helping you with your investment choices.

Speak with a Retirement Consultant

When it comes to your retirement, you have choices. Pick up the phone and review your rollover options with one of our retirement consultants today by calling 800-213-4583.
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