What to do with your 401(k) when you change jobs

Have a 401(k) that you haven’t moved from your old employer? You’re not alone.

In a study done by Capitalize, as of May 2023, there were 29,200,000 ‘forgotten’ retirement plans left at old employers. They estimate the overall assets held in these 29,000,000 retirement accounts make up roughly 25% of all assets held in 401(k) plans nationwide.

So why do so many people leave 401(k) plans with their employer when they change jobs?

In my experience, there are a few reasons:

1. Individuals don’t know what to do with them, so they leave them alone.

2. The process of getting your funds out of a retirement plan isn’t easy.

3. Consumers are worried about ‘incurring’ a big tax bill by moving their assets.

In this post, we’ll address these three concerns as well as outline what your options are when you leave your employer so you can choose what’s best for your situation.

What can I actually ‘do’ with my old 401(k) account?

You essentially have four options to choose from:

1. Leave your money in your old 401(k)

2. Rollover your money into your new 401(k) plan (if your new plan accepts rollovers)

3. Rollover your money into an Individual Retirement Account (Traditional IRA for pre-tax funds, Roth IRA for after-tax funds)

4. Cash-out your account

Leaving your money in your old 401(k)

Generally, not a whole lot is going to change when you leave your funds where they are. Ultimately, you’re going to be responsible for managing the account, researching the investments that the plan makes available to you, rebalancing your account, processing distributions in retirement, etc.

Most 401(k) plans have administrative costs that are passed onto you as the participant that get debited from your account. Your 401(k) plan will provide you information on these costs so that you can evaluate them. Overall, the cost to maintain your old 401(k) plans are minimal.

Leaving your money in an old 401(k) isn’t necessarily a bad thing as long as you’re staying on top of things and are making sure the investments are meeting your goals and are within your risk tolerance.

Rollover your money into your new 401(k) plan

When evaluating whether or not you should rollover fund into your new employers plan, you’re going to want to compare the investments available to you in each plan to make sure that moving the funds to your new employer makes the most sense. Most 401(k) plans offer a limited number of investment options (usually somewhere between 15-30). That’s not necessarily a bad thing, again, if the investments in the new plan are still meeting your goals. You just need to be aware that you’re most likely going to be limited in your overall investment selection.

If your new employer accepts rollovers from previous retirement plans, you can work with them to begin the rollover process. Rolling over the funds typically requires paperwork and/or a call to your old employer to have them issue a rollover check so that you can move the funds to your new employer. Most plans will charge a processing fee when you move your funds out of their custody (I’ve seen anywhere from $25 to $125 processing fees). 

Generally, if you have the rollover check made out to your new retirement plan, there will be no taxes due since you’re moving funds from one employer plan to another.

NOTE: it’s very important to do this process right to avoid delays and other issues. Typically, I find that it’s easiest to call the company where your old 401(k) funds are held and explain to them what you’re trying to do (i.e. – rolling your old 401(k) funds into your new employer’s 401(k)). Retirement plan companies are used to processing these types of requests. But, it’s important to be clear what you’re trying to accomplish when you get a representative on the phone.

Rollover money into an Individual Retirement Account (IRA)

Many people choose to consolidate their old retirement plans into Individual Retirement Accounts (IRAs). If you choose to go this route, be sure to open your Individual Retirement Accounts prior to starting the rollover process. If you have pre-tax funds that you are rolling over, you’re going to want to set up a Traditional Rollover IRA. If you have Roth dollars (a.k.a. after-tax contributions), you’re going to need to set up a Rollover Roth IRA to roll the funds into.

Many people choose to rollover their funds into Individual Retirement Accounts to give them more flexibility with the investment options that are available. With an IRA account, you aren’t limited to just the investment options that your employer provided. With an IRA account, you can buy individual stocks, individual bonds, mutual funds, ETF’s, etc. Here’s a brief guide of what investments you can and can’t hold inside an IRA.

It is important to recognize that rolling over 401(k) funds into an IRA account can come with some drawbacks.

One of the main drawbacks is that IRA accounts don’t hold the same consumer protections as 401(k) plans. Generally, assets held in a 401(k) plan are not subject to creditors if you get sued.

IRA assets are a different story (as of 2023, IRAs only have creditor protection up to $1,512,350), unless you rollover your funds specifically into a ‘Rollover’ Traditional IRA or ‘Rollover’ Roth IRA.

There are other ways to protect yourself (malpractice insurance, umbrella insurance, LLCs, trusts, etc.) if creditor protection is a concern of yours, but it’s important to be aware of the potential dangers before choosing a rollover option. 

Additionally, if you’re someone who utilizes the Backdoor Roth IRA contribution strategy, rolling over pre-tax funds into a Rollover Traditional IRA, may limit your ability to use the Backdoor Roth IRA strategy in the future due to the pro-rata rule.

As you can see, things can get complicated in a hurry.

Cashing out your retirement plan

The last option is to cash out your retirement plan altogether. For most individuals, this is going to make the least sense out of the 4 options, but an option nevertheless.

When you cash out your retirement plan, the total amount is included in your gross income for the year and subject to taxation (with the exception of any Roth contributions you made to your 401(k)).

If you’re under the age of 59.5, generally a 10% early withdraw penalty is added in addition to any other income taxes you may incur.

If you’re going to choose this option, you’re going to want to consult with a tax professional to assess the potential taxes due as a result.

Wrap-up

As you can see, there are several different options to choose from when evaluating what to do with your old 401(k) assets. Navigating the various rules and regulations surrounding each option can be complex which is why it may make sense for you to recruit professional help from a financial, legal, or tax professional to assess your options.

If you have an old 401(k) that you’re not sure what to do with, feel free to reach out and I’d be happy to evaluate your options and help you choose which one is best for you.

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About The Author

Caleb Pepperday, CFP®, ChFC® provides Fee-Only Financial Planning and Investment Management Services for medical professionals. Advanced Practice Planning, LLC is based in Missoula, MT, but works with clients in a virtual capacity nationwide.

As a CERTIFIED FINANCIAL PLANNER™ and fiduciary, Caleb Pepperday works to create financial plans for medical professionals with their best interest in mind. As a Fee-Only financial planner, Caleb Pepperday is only compensated through the investment management or financial planning fees that you pay him directly and never earns a commission.

Caleb Pepperday primarily focuses on helping mid-career and pre-retiree Physician Assistants/Physician Associates retire with confidence.

Disclosures:

The information provided in this article is for educational purposes only and is not intended as financial, legal, or tax advice. No content within should be construed as such. The material presented is based on general financial principles and concepts, and individual financial and tax situations may vary. Readers are strongly encouraged to consult with a qualified financial advisor, tax professional, or legal expert for personalized advice regarding their specific financial, tax, or legal circumstances. Any actions taken based on the information in this article are at the reader’s own discretion and risk. The author and publisher make no representations or warranties regarding the accuracy, applicability, or completeness of the information provided. This article does not endorse or promote any specific financial products, services, or companies. Readers are responsible for conducting their own research and due diligence before making any financial, legal, or tax-related decisions.