Changing jobs is a big moment in your career, but it often brings an important financial question: What should you do with your old employer 401(k)? Many people leave behind their retirement savings simply because it’s easy, but doing nothing isn’t always the best move for your financial future. Let’s explore your options, and a few of the common pros and cons of each, so you can make an informed choice.
1. Leave Your Money in the Old 401(k)
Pros:
- You might continue to benefit from low-cost institutional investments and plan protections.
- Your money remains tax-deferred, and you can avoid immediate tax consequences.
Cons:
- You have less control and flexibility over investments and withdrawals.
- If you leave multiple 401(k)s scattered with different employers, it can be difficult to track and manage your retirement strategy.
2. Roll Over to Your New Employer’s 401(k)
Pros:
- Keeps all your retirement money in one place, making it easier to manage.
- May grant access to better or more diverse investment options.
- Rolls over without triggering taxes or penalties, if done correctly.
Cons:
- Your new plan may have higher fees or fewer investment choices.
- You’ll need to check if your new employer’s plan accepts rollovers.
3. Roll Over to an IRA (Individual Retirement Account)
Pros:
- IRAs offer a wide range of investment options, often more than employer-sponsored plans.
- You may have lower fees and more flexibility with withdrawals after age 59½.
- No taxes or penalties if you do a direct rollover.
Cons:
- IRAs don’t offer loan options like some 401(k)s do.
- There’s less creditor protection compared to 401(k) plans.
4. Cash Out (Withdraw Funds)
Pros:
- Immediate access to your money.
Cons:
- Big tax bill! Withdrawals are taxed as ordinary income.
- If you’re under age 59½, you’ll face a 10% penalty.
- Your future retirement savings take a significant hit.
Key Tips Before You Decide
- Compare fees and investment options: Not all retirement accounts are created equal.
- Avoid the temptation to cash out unless you truly need the money.
- Direct rollovers help you avoid taxes and penalties—don’t just take the money and deposit it yourself.
Don’t Let Your Old 401(k) Collect Dust
Leaving your 401(k) behind with a previous employer might seem harmless, but consolidating or actively managing your retirement accounts helps you stay on track for your financial goals. Take action to ensure your retirement savings are working as hard as you are.
Need help? Consider consulting a financial advisor to make sure you’re taking the steps for your unique situation. Schedule a free, no-obligation 15-minute consultation with our wealth advisors at Gregory Ricks & Associates by phone or Zoom today by clicking “Schedule A Visit” below.
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