Changing jobs often comes with a long to-do list: benefits, insurance, payroll, tax forms, and new workplace routines. One important item many people overlook is what to do with the 401(k) they left behind.
If you have a retirement account with a former employer, you generally have four main options. Each choice has potential advantages, drawbacks, tax considerations, and investment implications.
At True North Wealth Management, we help clients evaluate old 401(k) accounts as part of the bigger picture. This includes retirement income, taxes, investments, fees, creditor protection, estate planning, and long-term financial goals.
Option 1: Leave the 401(k) With Your Former Employer
In some cases, you may be able to leave your 401(k) where it is.
This can make sense if the former employer’s plan offers strong investment options, low expenses, institutional share classes, or features that may not be available elsewhere. Some 401(k) plans may also provide creditor protections. Besides, access rules may differ from IRAs.
However, leaving money behind can create practical problems. Many people lose track of old retirement accounts after job changes, address changes, company mergers, or plan provider changes. A recent Kiplinger report noted that millions of forgotten 401(k) accounts exist, highlighting the importance of keeping retirement accounts organized.
Also, if your vested account balance is below certain thresholds, your former employer may be allowed to move or distribute the account. For example, Fidelity notes that balances under $1,000 may be cashed out or rolled into an IRA. Additionally, balances between $1,000 and $7,000 may be eligible for automatic rollover rules, depending on plan terms.
Option 2: Move the Money to Your New Employer’s Plan
If your new employer’s retirement plan accepts rollovers, you may be able to move your old 401(k) into your new workplace plan.
This can simplify your financial life by keeping retirement savings in one place. It may also preserve certain benefits associated with qualified employer plans. For example, creditor protection or potential loan access may be available if the new plan allows loans.
This option may be appealing if your new plan has a strong investment menu, reasonable costs, good online tools, and solid plan administration.
Before transferring, review the new plan’s fees, investment choices, Roth options, loan provisions, withdrawal rules, and beneficiary designations. Not every employer plan is better than the one you left behind.
Option 3: Roll the 401(k) Into a Traditional IRA
Another common option is rolling the old 401(k) into a traditional IRA.
An IRA may offer broader investment choices, more flexibility, and the ability to consolidate multiple old retirement accounts in one place. Kiplinger notes that rolling a 401(k) into an IRA may provide greater investment flexibility and more control over withdrawals. However, there are also reasons some investors may prefer to keep assets in a 401(k).
A rollover IRA can be useful if you want professional management, consolidated reporting, more investment options, or a coordinated retirement income strategy.
However, an IRA may not offer the same creditor protection as an employer retirement plan, depending on federal and state law. Also, it does not offer 401(k) loan access. Moreover, rolling pre-tax 401(k) assets into an IRA may also affect certain Roth conversion strategies, including backdoor Roth planning.
This is why a rollover should be reviewed carefully before moving assets.
Option 4: Cash Out the Account
Cashing out your 401(k) at a former employer is usually the most expensive option.
If you take a distribution instead of rolling the money into another qualified retirement account, the amount may be taxed as ordinary income. Additionally, if you are under age 59½, a 10% early distribution penalty may also apply unless an exception is available.
The IRS also explains that a retirement plan distribution paid directly to you is generally subject to mandatory 20% withholding. Even if you intend to roll it over later, this withholding applies.
Cashing out can also reduce future retirement savings. The money you withdraw no longer has the same opportunity to grow tax-deferred. Furthermore, rebuilding that balance later can be difficult.
In some situations, a distribution may be necessary. But before cashing out, it is wise to understand the full tax cost, penalty risk, and long-term impact.
Required Minimum Distributions
Retirement account decisions should also consider required minimum distributions, often called RMDs.
The IRS states that you generally must begin taking RMDs from traditional IRAs, SEP IRAs, SIMPLE IRAs, and retirement plan accounts when you reach age 73. Workplace retirement plan participants may be able to delay RMDs from a current employer’s plan until retirement. This is unless they are 5% owners of the business sponsoring the plan.
This distinction may matter for people who plan to work later in life.
Questions to Ask Before Deciding
Before making a decision about an old 401(k), consider:
How strong are the investment options in the old plan?
What are the fees and expenses?
Does the new employer plan accept rollovers?
Would consolidation make your financial life easier?
Do you need creditor protection considerations?
Are you planning Roth conversions or backdoor Roth contributions?
Do you need loan access from a workplace plan?
How close are you to retirement?
How will this affect your tax strategy?
Have you updated beneficiary designations?
The best option depends on your situation. There is no single right answer for everyone.
Make an Intentional Choice
An old 401(k) should not be ignored. Whether you leave it in the former plan, move it to a new employer plan, roll it into an IRA, or take a distribution, the decision should support your larger financial plan.
At True North Wealth Management, we help clients review old retirement accounts, compare options, understand tax considerations, and build a coordinated retirement strategy.
If you have a 401(k) from a former employer and are unsure what to do next, schedule a conversation with True North Wealth Management.
A thoughtful review can help you understand your choices, avoid costly mistakes, and keep your retirement strategy moving in the right direction.
Important Disclosures:
This material is for informational purposes only and is not intended as tax, legal, accounting, or individualized investment advice. Retirement plan rules, rollover options, creditor protections, tax treatment, and penalties vary by plan and individual circumstances. Withdrawals from traditional retirement accounts are generally taxed as ordinary income and may be subject to a 10% federal penalty if taken before age 59½ unless an exception applies. Please consult qualified tax, legal, and financial professionals before making decisions about a former employer retirement plan.
1. In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.
5. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.