Changing jobs can be an exciting opportunity, but it often leaves one important question unanswered: what happens to your old 401(k)? With millions of Americans switching employers during the “Great Resignation,” many workers leave retirement accounts behind. When that happens, savings can become scattered across various plans, making them more difficult to manage. Here’s an overview of the main options and why it’s important to make a thoughtful choice.
Why You Shouldn’t Ignore an Old 401(k)
While some employer plans let you keep a 401(k) balance of over roughly $7,000 in place, there are pitfalls to leaving money behind. Old accounts often get forgotten when passwords change or contact information goes stale. They no longer receive employer matching contributions, and the investment options and fees may not be as competitive as those available elsewhere. Most importantly, your former employer still controls the plan’s rules, so they can change the investment menu or fee structure without your input. Forgotten accounts under certain thresholds can even be automatically rolled into an IRA or cashed out .
Option 1: Leave It Where It Is
Keeping an old 401(k) with a former employer can be a solid strategy if the plan offers strong investment choices and low fees. However, if you choose to keep the funds there, set reminders to review the account regularly, maintain up-to-date contact information, and monitor whether the plan remains competitive.
Option 2: Roll It Into Your New Employer’s Plan
Consolidating your workplace retirement savings can simplify your life and provide you with access to better investment options. Not all plans accept rollovers, so be sure to check with your new plan administrator first. There are three ways to move the money:
- Direct rollover: Your former plan sends the funds directly to your new plan. Because the check is made payable to the receiving plan, no taxes are withheld.
- Trustee-to-trustee transfer: Your financial institutions transfer the money electronically. This method, often used for IRAs, also avoids withholding taxes.
- Indirect rollover: You receive a distribution in your name and have 60 days to deposit the full amount into your new plan. If you choose this option, 20% of the distribution is typically withheld for federal taxes. You’ll need to use other funds to make up the difference or the withheld portion will be treated as a taxable distribution.
Rolling into your new employer’s plan keeps all your workplace retirement savings in one place and continues to make you eligible for employer match contributions. Always review fees, investment options, and withdrawal rules to ensure the new plan meets your needs.
Option 3: Roll It Into an IRA
An Individual Retirement Account (IRA) gives you greater control and often more investment choices than an employer-sponsored plan. Consider the following:
- Choose a provider: Banks, credit unions, and brokerage firms offer IRAs. Compare fees, investment options, and services.
- Traditional versus Roth: Contributions to a traditional IRA are tax-deferred—you pay taxes when you withdraw the money in retirement. With a Roth IRA, contributions are made with after-tax dollars, but qualified withdrawals are tax-free.
- Coordinate the transfer: As with workplace plans, you can choose a direct rollover or trustee-to-trustee transfer to avoid withholding taxes and penalties. Indirect rollovers require redepositing the full amount within 60 days to avoid tax consequences.
Rolling into an IRA can provide flexibility and potentially lower fees, but be aware of contribution limits, income eligibility rules, and tax implications.
Option 4: Cash It Out (The Last Resort)
Taking a lump-sum distribution is rarely advisable unless you face a true emergency. Withdrawals before age 59½ usually trigger a 10% early withdrawal penalty, and the entire amount becomes taxable income, potentially pushing you into a higher tax bracket. In addition to taxes and penalties, you also lose the benefit of future compounding.
Mechanics of a Rollover
If your plan administrator pays the distribution directly to you, the IRS requires 20% withholding for federal taxes unless you elect a direct rollover or trustee-to-trustee transfer. After receiving the money, you have 60 days to roll it into another qualified plan or IRA. Failing to do so means the distribution will be treated as ordinary income and may be subject to a 10% early withdrawal penalty.
Don’t Lose Track of Forgotten Accounts
With frequent job changes, it’s easy to lose track of retirement accounts. Industry research suggests that millions of Americans have left money in old 401(k) plans, sometimes worth tens of thousands of dollars. To locate any accounts you might have forgotten, check the National Registry of Unclaimed Retirement Benefits, the Department of Labor’s Abandoned Plan Search, and your state’s unclaimed property database. Services like MissingMoney.com can also help.
Putting It All Together
Deciding what to do with an old 401(k) goes beyond convenience. It’s about aligning your retirement savings with your broader financial goals. Consolidating accounts simplifies management, ensures you don’t miss employer matches, and helps you monitor fees and performance. Rolling over money properly can avoid taxes and penalties, while an IRA offers flexibility and additional investment options. Cashing out should be a last resort due to penalties, taxes, and the loss of future growth opportunities.
Contact Us Today
Every situation is unique, so consider consulting a qualified financial advisor to help you weigh your options. At North Texas Wealth Management, we take a values-based approach to ensure your investments reflect what matters most to you. Staying informed and focused on your long-term plan will help you avoid getting caught up in short-term noise and make the most of your retirement savings. #807614
