What To Do With Your Old 401(k)?

“What should I do with my old 401(k)” is one of the most common questions I get asked by new financial planning clients. Answering this question is often one of the biggest financial decisions you need to make when switching jobs. You essentially have four options to choose from, keep your old 401(k) where it is, rollover your 401(k) to an IRA, rollover your old 401(k) to your current 401(k), or cash out your retirement plan.

There are a few things to consider when making this choice, including your age, your 401(k) balance, your investing knowledge, and the investment options in both your old and new retirement plans.

Your Age and Your 401(k) Rollover

In most cases, if you make withdrawals from your retirement account before age 59.5, you will owe both taxes and penalties. However, rolling over your plan to an IRA or another retirement account is not a taxable event and will not incur taxation or penalties at that time.

But if you are leaving your job around the time you turn 55 (or later), you can avoid the 10% early withdrawal penalty. Of course, the withdrawal will still be taxable.  Unfortunately, the “55 rule” does not apply to IRAs. For IRAs, a penalty-free withdrawal generally won’t be permitted until the account holder is 59½.

Low Balance 401(k) Withdrawal

Participants in a 401(k) with less than $5,000 can be forced out of the plan. Simply put, staying in the current 401(k) plan may not be an option if your balance is too small. So, you should make a concerted effort to get the money rolled over to a new plan or an IRA.

How Are the Investment Options?

When you choose to stay with your current or previous employer’s 401(k), you are often limited to their selected investment options and fee structure. You will likely be able to find better pricing and investment options on the open investment market. On the flip side, this seemingly unlimited amount of investment choice can be overwhelming and may prompt you to reach out for professional financial planning guidance.

Flexibility and Control for Withdrawals

If you are already retired or quickly approaching retirement, IRAs will often offer more flexibility and access to your money when needed. Many 401(k) plans make it quite onerous to get your money out when needed—for example, mailing copies of signed forms to tell them to mail you a check when this all could easily be done online with a few clicks of a button.

Asset Protection

Under federal law, 401(k)s assets potentially offer more protection against creditors than assets held in an IRA. It is quite difficult for creditors to seize 401(k) assets. There are exceptions, of course. If you aren’t at risk of being sued or aren’t drowning in debt, this likely won’t be a big issue.

Ultimately, the decision of what to do with your old 401(k) will depend on how comfortable you are with managing your own investments, how far you are from retirement, and the quality of your current and prior retirement plans. As you can imagine, as a financial planner with a fiduciary duty to my clients, there is rarely a case when I would recommend you just cash out your old 401(k) when accounting for taxes and penalties.