What should I do with my old 401k plan?

December 10, 2021

In September, 4.4 million Americans (3% of the total workforce) quit their jobs. In just one month! If you’ve made a similar move recently, it’s a good time to consider what options you have with that 401k you set up a long time ago but forgot about. 

Americans are in the midst of “The Great Resignation,” which is a remarkably exciting time for the younger generations. We are deciding we will no longer work for companies whose values do not align with our own. We are deciding, after close to two years of flexibility in our working schedule, that some of the ideas of traditional employment no longer serve us. We are deciding to venture out to pursue passion projects, focus on side hustles, or even start our own businesses. 

It’s important to emphasize that because every employer plan is different and the rules vary from plan to plan, it’s very hard to talk about 401k plans universally. With that said, however, you generally have four options to consider with a 401k plan when you leave your employer. 

Option 1: Leave it where it is.

Depending on the plan, you probably have the option to leave your money where it is. Be aware that the fees may change or you may be required to keep a minimum balance in the account ($5,000 minimum is common). 

Pros: It’s simple. The costs are (usually) low.

Cons: The investment options are limited. If you have other accounts or a new 401k plan with your next employer, the old account becomes one more asset to manage. 

Who should consider this option? If you are happy with the investment options, fees, and plan rules, and you are comfortable managing this money separately from your other finances, this option may be worth considering.

Option 2: Roll it over to a new employer plan.

Again, depending on the rules of your new employer plan, you may be able to move your old 401k right into your new 401k. There may be some paperwork involved and you’ll want to confirm eligibility and the process with your new 401k provider.

Pros: It keeps everything in the same place and under the same investment strategy. Costs are (usually) low. If you’re a high earner, this may give you additional flexibility in accounts outside of a 401k (talk to a financial planner if you’re a high earner with an old 401k).

Cons: Investment options are limited. You must follow the new plan rules, which can be restrictive. 

Who should consider this option? If you’re happy with the investment options and plan rules in your new 401k plan and you just want everything in the same spot, this is an option worth considering. 

Option 3: Roll it over to an IRA (and/or Roth IRA).

Pretty much every 401k plan will allow you to roll over your account into an IRA. An IRA, like a 401k, is a retirement account, but rather than being tied to an employer, it’s an “individual” plan (that’s what the “I” stands for). 

Pros: An IRA has less restrictive rules compared to a 401k and virtually unlimited investment options. It can also provide a “home base” for your money. 

Cons: The fees can sometimes be higher than a 401k plan and some people don’t love the idea of opening another account. 

Who should consider this option? I’ve found millennials like the option of turning an IRA into a “home base.” We’re not like our grandparents who worked one job for 40 years and retired with a nice pension; we’re going to change jobs several times by the time we retire. With that in mind, some millennials are deciding to open an IRA so they can just roll old 401k money into the IRA every time they switch jobs. If you want to have a plan in place so you don’t have to read articles like this every time your employment changes, this is an option worth considering. 

Option 4: Cash it out. 

I wouldn’t say there are any “wrong answers” on this list, but I would definitely encourage this to be your last consideration. Cashing out an old 401k is a great way to boost a bank account, but it can be disastrous to your retirement planning. 

Pros: Cash that can be used for something other than retirement. 

Cons: Taxes, a 10% penalty (if you’re under age 59.5), and an impact to your retirement savings are all things to consider.

Who should consider this option? Someone with few other options to get cash for an immediate need. I would strongly encourage you to speak with a financial planner and a CPA before making this decision. 

All the options listed above are dependent on your own personal situation and your financial plan. If you’re unsure of what to do with that old 401k, reach out. I’d be happy to help you make the decision.

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