Navigating Your Old 401(k): Make an Informed Decision

Published by Gabe Fransen on

Gabe Fransen | February 16, 2024

Transitioning jobs often involves leaving behind retirement accounts, such as a 401(k) provided by a previous employer. While it may be tempting to overlook these accounts amidst the flurry of change, neglecting them can lead to missed opportunities for financial growth. Let’s explore the options available for an old 401(k) and provide insights to help you make informed decisions about your retirement savings.

It is important to understand your options when leaving a job, you should check with your previous employer and/or the plan administrations for your specific situation, but individuals typically have the following choices regarding their old 401(k) accounts:

  • Leave the funds in the current plan, if allowed by the employer.
  • Roll over the funds into a new employer’s retirement plan, if applicable.
  • Transfer the funds into an Individual Retirement Account (IRA).
  • Cash out the account, although this option may result in taxes and penalties.

Each option has its own advantages and disadvantages that should be considered. There are nuances in each individual situation, but typically here are the pro’s and con’s that we see when evaluating the options listed above:

  • Leaving funds in the current plan may offer simplicity and be a timesaving way to move forward, but it could limit investment choices and make tracking retirement savings more challenging with lack of consolidation
  • Rolling over funds into a new employer’s plan may consolidate retirement accounts and streamline management, but it’s contingent on the availability and terms of the new plan including, but not limited to a potential lack of menu options in the new 401(k) plan
  • Transferring funds into an IRA provides flexibility in investment options and allows for continued tax-deferred growth and flexibility for Roth Conversions, but we’d suggest professional account management if going in this direction
  • Cashing out the account should generally be avoided, as it can trigger taxes, penalties, and diminish long-term retirement savings.

You’ll want to assess investment options and evaluate what is available within each potential destination for your old 401(k) funds. Consider factors such as fees, performance history, and alignment with your risk tolerance and investment goals. If rolling over into an IRA or a new employer’s plan, ensure that the investment choices align with your long-term financial strategy. Of course, you’d want to consider short term and long term tax Implications. Rolling over funds into a traditional IRA or a new employer’s plan typically allows for continued tax-deferred growth, while cashing out may incur immediate taxes and penalties. Additionally, rolling over into a Roth IRA or having the ability to do Roth conversions involves paying taxes upfront but offers tax-free withdrawals in retirement, provided certain conditions are met.

Once you’ve weighed the options and assessed your preferences, take decisive action to manage your old 401(k) accordingly. Initiate the necessary paperwork for a rollover or transfer, ensuring compliance with IRS regulations and employer procedures. If opting to leave the funds in the current plan, monitor the account periodically and adjust investment allocations as needed. If you’re uncertain about the best course of action for your old 401(k), consider consulting with a financial advisor or retirement specialist. These professionals can provide personalized guidance tailored to your individual circumstances, helping you navigate the complexities of retirement planning and optimize your financial future.

To sum it up, we’d recommend having thoughtful consideration and proactive decision-making when managing an old 401(k). By understanding your options, evaluating investment choices, considering tax implications, and taking decisive action, you may put yourself in a better position to effectively preserve and grow your retirement savings. Whether opting for a rollover, transfer, or maintaining the status quo, prioritize strategies that align with your long-term financial goals and help strengthen a secure retirement.