Your Old 401(k) Account: The 3 Options
A dollar caught in an old cage, that is, an old 401(k) plan you might forget about.
You’re switching jobs, or you have a retirement account from an old employer lingering (or possibly several previous employers). What should you do with it? Managing old 401(k) accounts is one of the pieces of our financial lives that can be scary and intimidating because you might be nervous to make the wrong choice, or to lose track of the money, or to accidentally accrue some unintended taxes or penalties. But don’t fear! Here are your options, along with the pros and cons of each.
First of all, you’re already on the right track by remembering it’s there! That means you’re not adding to the already millions of dollars forgotten about each year in old retirement accounts. 🙏 Winning.
You essentially have three options:
Keep it where it is (aka do nothing)
Roll it over into a new employer 401(k)
Roll it over into your own rollover IRA (or Roth IRA)
Those are the 3 options that could make sense for you without incurring any taxes or penalties. (I’m not including just withdrawing the balance and using the money as an option since you’re probably not eligible to do that yet!) Let’s walk through.
Keep it where it is (aka do nothing)
Eligibility: If you have “too small” of an amount in your old account, you are forced to remove it one way or another, and you have to consider the other two options. Generally this is about $5k or so, but it depends on the specific plan.
Pros:
No effort required
Pre-marriage assets remain pre-marriage assets without commingling (e.g. if you weren’t married yet when contributing to this account)
Maintains the 401(k) “container”
Your investment options here may be diversified and low-cost with minimal plan fees
Cons:
The other two options require some effort from you (but you can do it!)
This now remains an extra account that you have to keep track of
The investment options may be expensive and/or there are more extensive plan fees to work through
2. Roll it over into a new employer 401(k)
Pros:
Maintains the 401(k) “container”
Optimizes for maintaining the fewest accounts
Your current 401(k) plan at your new employer may have low-cost investment options with appropriate asset allocation options and low fees
Cons:
If your new 401(k) is not that great actually (e.g. high investment fees and/or insufficient options)
Takes work to start and monitor the rollover process
Be cautious about unintentionally commingly any pre-marriage money with post-marriage if you are trying to keep them separate
3. Roll it over into your own rollover IRA (or Roth IRA)
Pros:
Optimizes for maintaining fewer accounts
Almost unlimited investment options
Great if new 401(k) is not great (you can only roll money into retirement accounts with current employers)
Cons:
Loses the 401(k) “container”
Takes effort (similar amount to option #2)
Backdoor Roth IRA eligibility may now be limited going forward if you now have pre-tax money in a rollover IRA (or SEP IRA or SIMPLE IRA, for that matter)
In general, the three options above are your main options to handle your retirement money in a smart way. Of course, make sure that your pre-tax money remains pre-tax and Roth money remains Roth, regardless of which option you go with. There are appropriate “container” options for both pre-tax and Roth money though, so don’t let that stop you from taking the action that makes sense for you. When/if you call to inquire about the rollover process to your old employer’s 401(k) administrator, the plan administrator may tell you that you have both pre-tax money and Roth money inside your plan. Make sure they keep the same flavors when/if you decide to roll over!
Note: 403(b) and 457(b) plans have similar concepts to the above, but there are some slight differences to be aware of.
Does that help outline your questions? What remaining questions do you have?
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