Have you changed jobs recently or plan to in the future? If you have a 401(k) or a retirement savings account through your employer, you might wonder what happens to those funds when you leave the company.
The good news is that the money that you contribute to your 401(k) account is all yours. Contributions made by your employer are yours too, as long as you meet any vesting requirements.
And, you have several choices for what to do with your retirement savings after you leave a company. Below are the four main options, along with a summary of pros and cons to keep in mind for each.
1. Keep your retirement savings with your former employer
The first option is a simple, low-effort one: You can keep your 401(k) savings with your previous employer, and they would continue to administer your 401(k).
Though it seems like the simplest, it's not always the best choice for everyone. It's worth checking with the 401(k) provider to see if they even allow it, as well as what their portfolio fees and options are. For example, if your vested account balance is $7,000 or less, some providers will require you to move the money elsewhere. And, your all-in fees might be expensive—in which case you might be able to find a lower-fee option.
Last, you'll likely change jobs several times throughout your career. Having multiple 401(k) accounts with multiple companies may be difficult to keep track of.
In summary:
Pros:
Your savings will continue to grow tax-deferred
Takes little effort; you can simply leave your 401(k) funds as-is
You are eligible to take penalty-free withdrawals if you separate from the employer sponsoring your 401(k) account in the year you reach age 59 1/2 or later1
Cons:
The terms of the plan may not allow you to keep your retirement savings in your 401(k) account if your balance is below a certain amount
You cannot make additional contributions to that 401(k) account, since you are no longer an active employee
Your 401(k) savings may be spread out and hard to manage if you leave multiple accounts with multiple former employers
Your former employer's 401(k) plan may have high investment and administrative fees
Your investment options will be determined by your former employer's plan
You may not have access to loans and hardship withdrawals
2. Roll over your 401(k) into an IRA
A popular option is to move your 401(k) funds to an IRA — either Traditional or Roth.¹ Additionally, you can roll over multiple 401(k) accounts into a single IRA, which can make accounting and recordkeeping much simpler.
While Roth assets in your 401(k) can only be rolled into a Roth IRA, pre-tax and non-Roth after-tax assets have two options. First, you can move all of them to a Traditional IRA where they will continue to grow tax-deferred. Second, you can also "convert" them to Roth. In this case any pre-tax amount (pre-tax contributions and their earnings as well as earnings on non-Roth after-tax) will be taxable in the year the amount is converted. However, any earnings on the converted amounts can be distributed tax-free provided it is a qualified distribution.2
With an IRA, you may have access to broader investment choices (instead of those dictated by your former employer's plan). Also, if you're under 59 ½ an IRA has exceptions to the 10% early distribution penalty for pre-59 ½ distribution that are not available for distributions from an employer plan, including a first-time home purchase (up to $10,000), qualified higher education expenses, and health insurance premiums while unemployed.
The cons? There are options that may be available under an employer plan that simply are not allowed in an IRA. These include the availability to take a loan or delay any required minimum distributions until you actually stop working for that employer. Additionally, IRAs don’t have the same personal bankruptcy protection that most employer sponsored plans have3. While both federal and state law protect IRAs to a certain level — assets in most employer sponsored plans are completely protected.
In summary:
Pros:
Your money can continue to grow tax deferred
You can consolidate multiple tax-deferred retirement accounts into one IRA, which can be simpler to manage
You may be able to withdraw your funds penalty free for certain reasons, even if you're under the age of 59 ½
Cons:
Unlike many 401(k)s, you cannot take a loan from your IRA
Fees and expenses could potentially be higher than in your former employer's plan
3. Roll over your old 401(k) to your new employer's retirement plan
A third popular option is to move your 401(k) from your previous employer's 401(k) to the new one, assuming your new employer’s plan allows it. This too has some pros and cons. If you plan to stay at your new company for a long time, it can be helpful to consolidate your previous 401(k) funds with your new employer's. Ultimately, however, it's worth comparing the fees in your new employer's plan against your previous employers', as well as with those of an IRA. Comparing administration and portfolio fees side-by-side will allow you to make a more informed decision as it relates to fees and expenses for your retirement savings.
In summary:
Pros:
Like all employer sponsored plans, your money can continue to grow tax deferred1
Consolidate your retirement assets into one place
You may have access to loans and hardship withdrawals
Cons:
You will be subject to the distribution options under the new plan
Your investment options will be determined by your new employer's plan
4. The "Cash out" option
There is—technically—another option, though you should think carefully before choosing it due to the tax consequences: You can cash out the funds from your previous 401(k) by distributing the funds directly to you. While it does give you immediate access to your assets, there are three main considerations: 1) the pre-tax amount will be included in your income for the year, 2) you may be subject to a 10% IRS early distribution penalty if you are under 59 ½ and do not qualify for an exception, and 3) you will miss out on the future earnings those assets could have generated had they stayed in a retirement account.1
Additionally, the pre-tax1 portion of the distribution would be subject to a mandatory 20% federal income tax withholding provided it is eligible to be rolled over. If you choose to rollover the distributed amount to an IRA or other eligible retirement plan within 60 days, the withheld amount would need to be made up out of pocket to avoid taxes and penalties.
In summary:
Pros:
You gain immediate access to your money, after withholding is applied
You can still roll over eligible amounts without any tax consequences within 60 days of receiving your distribution (will need to make up the 20% withheld out of pocket)
Cons:
20% mandatory federal withholding will apply to any pre-tax amount eligible to be rolled over
Your cash distribution may be subject to multiple taxes, including local, state, and federal income taxes
If taken before age 59 ½, your withdrawal may be subject to a 10% early distribution penalty unless an exception applies
You may miss out on the potential growth of your retirement assets by distributing them early, instead of letting them grow tax-deferred
Deciding what to do with your retirement savings from a former employer can seem daunting, but it's worth exploring the options. Management and portfolio fees can have a big impact on your savings—especially over the course of decades—so it's important to research and find the best solution for you. After all, we work to retire!
FAQs
What are my options for an old 401(k) when I leave a job?
You have four main choices: (1) leave it with your former employer's plan, (2) roll it over to a traditional or Roth IRA, (3) roll it over to your new employer's plan, or (4) cash it out. The fourth option is highly discouraged due to taxes and penalties. The best choice for you will depend on the fees in each plan, your investment preferences, and how many accounts you want to manage.
Should I roll my old 401(k) into an IRA or my new employer's plan?
Both are solid options; the main factors are fees and flexibility. An IRA typically offers broader investment choices and simpler consolidation of multiple old accounts. Rolling into your new employer's plan keeps everything in one plan and may give you access to plan loans and hardship withdrawals. Compare the all-in fees of each option side by side before deciding.
Can I leave my 401(k) with my former employer indefinitely?
Often yes, but not always. If your vested balance is $7,000 or less, your former employer's plan may require you to move the funds. Even if allowed to stay, you can't make new contributions as a former employee, and you may be subject to limited investment options and potentially higher fees. It's worth checking the plan's terms.
What happens if I cash out my old 401(k)?
Cashing out triggers immediate tax consequences: a mandatory 20% federal income tax withholding on the taxable amount, plus a 10% early distribution penalty if you're under age 59½ (with some exceptions). You'd also lose the benefit of possibly decades of potential tax-deferred growth. For most people, rolling over to an IRA or new employer plan is a significantly better outcome financially.
Can I roll my traditional 401(k) into a Roth IRA?
Yes, but you'll owe income taxes on any nonRoth amounts converted in the year of the distribution. If you have Roth 401(k) funds, those can roll directly into a Roth IRA without a tax hit. Your current vs. expected future tax bracket can indicate whether a Roth conversion makes sense right now.
Disclosures
¹ This content is for informational purposes only and is not intended to be construed as tax or investment advice. You should consult a tax professional or financial advisor to consider all alternative options to rolling your money into a 401(k). Investing involves risk, and investments may lose value, including loss of principal.
² IRA: Roth contributions are always distributed tax-free. The earnings on Roth contributions will be tax-free if the following conditions are met: (a) you're either over age 59 ½, disabled, have died, or are making a first time home purchases (limited to $10,000 in your lifetime) AND (b) it has been 5 years since your first contribution to any Roth IRA. 401(k): Roth contributions are always distributed tax-free. The earnings on Roth contributions will be tax-free if the following conditions are met: (a) you're either over age 59 ½, disabled, or have died, AND (b) it has been 5 years since your first Roth contribution under the current plan. Please consult a qualified financial advisor or tax professional to determine what is applicable to your financial situation.
3 In certain circumstances, assets rolled over from an employer-sponsored plan into an IRA will keep the unlimited personal federal bankruptcy exemption they had under the employer plan, rather than being subject to the separate federal exemption that otherwise applies to IRAs. To preserve this protection, the former employer plan assets must not be commingled with other IRA assets, and their origin must be documented. State law may provide additional or different creditor protections.
