When you change jobs, your 401(k) or 403(b) retirement plan doesn’t automatically follow you to your new employer. This creates a critical financial decision point that many Americans overlook. According to research from Capitalize, over 25 million 401(k) accounts containing more than $1.3 trillion in assets are sitting forgotten or unmanaged. That’s an astounding amount of money that people have essentially left behind – comparable to walking away from your paycheck when leaving a job.
Understanding your options for these old retirement plans is essential for maintaining your long-term financial health. There are four primary paths you can take, each with distinct advantages and potential drawbacks. The first option is simply leaving your money where it is. If your account contains more than $7,000, most plans allow you to keep your funds in your former employer’s plan indefinitely. This approach can be advantageous if you worked for a large employer offering low-cost investment options with a robust menu of choices. However, the primary disadvantage is that you’re more likely to forget about these accounts over time, leaving them unoptimized and potentially underperforming.
The second option, which works well for many individuals, is rolling your old 401(k) into your current employer’s plan. This approach keeps all your workplace retirement savings consolidated in one location, making it easier to manage and monitor. You’re already contributing to this plan from your current paycheck, so you’re more likely to stay engaged with it. However, you will be limited to the new plan’s investment options, which could be either an advantage or disadvantage depending on the quality of those choices. One strategic consideration: keeping pre-tax money in an employer 401(k) plan (either your old or current one) preserves your eligibility for backdoor Roth IRA contributions if your income exceeds the limits for direct Roth contributions.
The third option involves rolling your retirement funds into an Individual Retirement Account (IRA). If you had traditional pre-tax contributions, these would roll into a traditional IRA; Roth contributions would transfer to a Roth IRA. This approach often provides more investment flexibility and options than employer-sponsored plans. However, it’s important to note that while you can roll money from a traditional IRA back into a 401(k) plan (if the plan accepts such rollovers), you cannot roll Roth IRA money into a Roth 401(k) – a peculiar regulatory limitation. Additionally, while IRAs offer more investment choices, they might come with higher costs than employer plans and may not provide access to institutional-class funds with lower expense ratios.
The fourth option – cashing out your retirement account – generally should be avoided except in dire financial emergencies. This approach triggers substantial tax consequences: you’ll pay ordinary income tax on the entire distribution plus an additional 10% early withdrawal penalty if you’re under age 59½. For example, if you cash out $50,000 from your 401(k) while earning a $75,000 salary, your taxable income jumps to $125,000 for the year. Between regular income taxes and the 10% penalty, you could easily lose 25-30% of your distribution to taxes, significantly undermining your long-term retirement security.
When deciding among these options, consider several key factors: fees and expenses (particularly if your old plan was with a small employer with higher administrative costs), investment choices (whether you have access to a good range of options or beneficial target-date funds), access needs (current employer 401(k) plans often allow loans, which can be more advantageous than complete withdrawals), and the benefits of consolidation (fewer accounts means less complexity and potentially better oversight). Don’t let these accounts become forgotten assets – take proactive steps to ensure your retirement savings continue working effectively toward your long-term financial goals, regardless of how many times you change employers throughout your career.