Leave No 401(k) Behind: What to Do With Old Retirement Plans

Whether you’re leaving your job by choice or not, don’t forget about your 401(k) plan. As workers continue to leave their jobs at an elevated rate and some companies embark on layoffs, there’s a good chance some departing workers will be leaving an employer-sponsored retirement plan behind. While not everyone has a 401(k) or similar workplace retirement plan, those who do may want to know what happens to their account when they leave a job and the options.

Broadly speaking, you have several options for your old 401(k). You may be able to leave it where it is, roll it into your new workplace plan or an individual retirement account, or cash it out, although we generally caution against the third move. First, you’ll likely pay income taxes on the distribution. And with some exceptions, you’ll typically also pay a 10% tax penalty if you’re younger than 59½, which is when withdrawals from 401(k)s and other retirement accounts can begin.

Perhaps the easiest thing you can do is leave your retirement savings in your former employer’s plan if permitted. Of course, you can no longer contribute to the plan. Nor will you be able to take a loan from that account as you may be able to when you’re an active employee in the 401(k). Also, be aware that if your account is small enough, you may not be able to keep it at your former employer even if you want to. If the balance is between $1,000 and $5,000, your ex-employer can roll over the amount to an IRA. (Secure 2.0 changed that upper limit to $7,000, effective for distributions made after 2023.)

Another option is to transfer the balance to another qualified retirement plan, such as your new employer's 401(k), assuming the plan allows it. The main advantage of this option is consolidation of your accounts and less to keep track of. You could also roll it over to an IRA, which may provide more investment choices but also come with higher fees, which can eat away at your nest egg.

Be mindful that if you have a Roth 401(k), it can only be transferred to another Roth account. It is important to keep Roth dollars in Roth accounts because you want the Roth money to be tax-free when you eventually take your withdrawal.

Bottom line: it’s always wise to be aware of all of your retirement assets, even those in accounts with past employers. Consolidation will likely make the most financial sense and save you the headaches of multiple accounts in multiple places.

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

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