What to Do With an Old 401(k)? 4 Choices to Consider

If you've frequently changed jobs, you may have forgotten about your 401(k) funds. Read these choices to determine what to do with an old 401(k) held with a former employer.

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22 min read
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Key Takeaways

  • Take stock of your old 401(k) plans to ensure you maximize your retirement savings 

  • Understand potential penalties for early withdrawals and why cashing out is the least desirable choice

  • Consider any fees and underlying funds as they may impact your savings

One thing to consider when changing jobs or nearing retirement is what to do with your old workplace savings plan. 

The more frequently you’ve changed jobs, the greater the chance you may still 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), you can 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 because your old 401(k) was likely merged into the new entity’s 401(k) plan.

Consider All Your Choices

After locating 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, retirement account savings, including the ones they accumulated at past jobs, end up forming a major part of their retirement funds, so it’s important to consider all your 401(k) alternatives, from keeping it to rolling it into an individual retirement account (IRA).

Choices for your old 401(k)

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

  • 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 investments 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?
  • Once you reach age 72 (70 1/2 for anyone born before July 1, 1949), the rules for 401(k) plans and IRAs may require you to take required minimum distributions (RMD). If you’re still working at age 70 1/2, you generally aren’t required to take RMDs 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, from maintaining your retirement account to 401(k) alternatives. 

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 59 1/2 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. These days, the average person will change jobs every three to five years during their career, so you should consider if you want to juggle multiple 401(k) accounts. Additionally, your former employer might pass along certain plan administration or record-keeping fees, and if it does, 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 to fees. The other advantage of rolling into the new plan is that if you end up needing the money before you turn 59 1/2 and you have left your job after age 55, you may be able to take penalty-free withdrawals from your most current former employer’s 401(k). 

Before you decide to roll your money into a new 401(k) plan, understand your investment choices will likely 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. Among your choices for 401(k) alternatives is to take your old plan, or plans, and roll them over into an IRA. As with a 401(k), your funds can continue to grow tax-deferred until withdrawn, and you may be able to make new contributions within normal IRA limits to continue growing savings. Plus, account maintenance fees are usually minimal. However, unlike most 401(k) plans, with an IRA, you’ll likely have a much wider variety of investment choices, including mutual funds, ETFs, stocks, bonds, options, and more. And you may be able to take penalty-free withdrawals before age 59 1/2 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, a 401(k) may allow you to take penalty-free distributions from your most recent plan after age 55. 

Cashing out. Of the four, cashing out may be the least desirable choice, 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’ll 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’re under age 59 1/2. 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 401(k) account is that it allows your pre-tax 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 alternatives, and choose the one that helps you make the most of your savings for retirement. And should you choose to roll your old 401(k) accounts into a TD Ameritrade IRA, our financial consultants can help you through the process, from helping you with goal planning to guiding you with your investment choices.

Speak with a Financial Consultant

When it comes to your retirement, you have choices. Learn more about rolling over your old 401(k) and decide if it’s the right decision for you by calling 800-454-9272 and speaking to a new account representative. Get your questions about IRAs answered here.

TD Ameritrade does not provide tax advice. Before deciding whether to retain assets in a 401(k) or roll over to an IRA an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions, and possession of employer stock. Keep in mind that taking a lump-sum distribution can have adverse tax consequences. Whatever you decide to do be sure to consult with your tax advisor with regard to your personal circumstances.

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Key Takeaways

  • Take stock of your old 401(k) plans to ensure you maximize your retirement savings 

  • Understand potential penalties for early withdrawals and why cashing out is the least desirable choice

  • Consider any fees and underlying funds as they may impact your savings

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