Changing Jobs? What To Do With Your Old 401(k)

Financial Planning
Emily Millsap – Manager, Financial Planning

Tax season can induce anxiety. But it’s important to remember your attitude is greatly affected by your perspective. Instead of succumbing to stress, think of this time of year in a positive and productive light! 

As a financial planner, I see tax season as the perfect time of year to check in on your finances, focusing on items that may have fallen through the cracks during “business as usual” in your daily life – especially if you’ve changed jobs. 

Life can be hectic when you start a new job. You bid farewell to your previous work family, fill out seemingly endless paperwork, and attend countless meetings to learn more about your new role. Throughout this chaos, there’s one task I often see fall through the cracks as a financial planner: remembering your 401(k) with your previous employer. In fact, based on research by Capitalize, 1 in 5 U.S workers have forgotten or left behind a 401(k) plan when changing jobs. Even more startling, it’s estimated that 243 million 401(k) plans have been left behind, totaling $1.35 trillion dollars.  

If you’re the one in five, don’t be too hard on yourself. After all, most people mentally deem retirement plan dollars as “later” dollars and not “today” dollars, and they quickly get pushed to the back of our minds. However, as you prepare to file your taxes and pull together your financial information, seeing your tax documents from your prior job can be a good reminder to take action.

So, what should you do with that “old” 401(k)? Ideally, you should consult with a tax-intelligent financial professional to explore options that are best-suited to your unique situation. In the meantime, here are four options to examine, including considerations for each:

  1. Roll your old retirement plan into your new employer’s plan. 
    • It’s usually easy to do! I recently rolled my prior employer plan into my new employer plan and it was a simple online process. 
    • Your accounts will be consolidated in one place. Having fewer accounts to manage, rebalance and keep track of can make your finances feel less overwhelming. 
    • If you plan to retire early, it may be beneficial to have a larger pool of money in your 401(k) as you may be able to draw from your 401(k) penalty-free at age 55 (versus age 59 ½ for dollars in your IRA). 
    • Depending on your income level, you may not be able to make a direct contribution into a Roth IRA.  By consolidating Traditional IRA dollars into your employer sponsored plan, you have the possibility of backdoor Roth IRA contributions. 
  2. Roll your old employer plan into a Traditional IRA. 
  3. Leave your plan with your old employer. 
    • Although this choice is the simplest and requires no action on your part, you run the risk of losing track of these dollars or incurring additional fees (such as administrative or dormant account fees).
  4. Cash out your retirement plan. 
    • It’s important to note you will pay taxes on any pretax dollars as well as a 10% penalty if you are younger than 59 ½.   

While you have plenty of options to choose from when considering what to do with a 401(k) from your prior job, it’s most important that you simply take action and do something with your account. Those retirement plan dollars you may have forgotten over the years could make a huge difference in your retirement readiness!