What to Do with Your Old 401(k): 4 Smart Options for Your Financial Future

Twelve. That’s how many jobs the average American worker has over the span of their lifetime.¹

If you are lucky, one of those will end up being your dream job. A job you are proud of, and where you earn your ideal wages - which allows you to reach your vision of a successful retirement. On the way to retirement, studies show most retirement savings will be made via your employer sponsored plan - more commonly known as a 401(k)². Assuming that is the case for you as well, what are your options for your old 401(k) accounts as you move from one employer to the next? This article will aim to address that question and educate you as to what each option means for your financial picture.

Simply put, there are four options surrounding your 401(K) when you transition to a different employer.

1. Take no action. In most cases you are allowed to leave your 401(k) with a previous employer. As advisors, we see this quite often during the consolidation phase. We often meet with prospective clients who have forgotten about old plans they left with previous employers - which can be a very fun surprise when they discover money they forgot they had! Assuming the option of leaving the assets where they are is allowed, you are still the owner of the account and will be left to make changes to it on your own accord. However, contributions are no longer permitted within the account, your withdrawal options can be reduced, and you are responsible for overseeing that required actions such as RMDs are fulfilled. In essence, you are the captain of your ship.
2. Rollover the account into a like registration account, such as an Individual Retirement Account (IRA). Like Registration in this instance refers to the taxable status of the account. For instance, if you are rolling over a traditional (pre-tax) 401(k)- it will need to roll over to a traditional IRA. Rolling over a Roth 401(K)? That can be rolled over to a Roth IRA. When rolling over a Roth 401(k), pay attention to whether there are any pre-tax contributions in the account which would have come from your employer. These will need to be rolled into your pre-tax, Traditional IRA as opposed to your Roth IRA. It is always best to consult a professional during a rollover to increase tax efficiency. Here you will typically have broader investment options, and may be allowed to contribute to the account, depending on your income, while also having more control over your tax picture.
3. Roll your old 401(k) into your new 401(k). This is another common option since most people are not aware they can roll their previous 401(k) into an IRA. Not every employer will allow for this option however, and if not done correctly- this can lead to unwanted tax implications. You will also want to weigh the pros and cons of this choice given the average 401(k) has 27 investment choices³. Due diligence is important here to make sure the investments align with your financial picture, as do the stipulations of the new plan. Additionally, if a person chooses to go this route, you will want to inquire about a trustee-to-trustee (i.e. Fidelity to Schwab) eligibility to help avoid tax implications.
4. Cash out the account. This option may present the most risk, as it can lead to a significant amount of taxation and perhaps a penalty if not facilitated correctly. Retirement is a long-term plan and removing the entirety of your retirement savings from an account in one fell swoop can have a serious impact on your long-term goals. Penalties come into play if you do this prior to the age of 59.5 as well! So even though you should always consult your financial advisor before making one of these choices, you may also want to consult your tax professional if this is the route you decide to go.

As is always the case, the decision around which option is most appropriate for you and your personal financial picture depends on you as an individual and your idea of living richly. At CWM, our Advisory Team can help you decide which option best suits your specific situation. Contact Us or call the office at (425) 778-6160 to schedule an appointment.

It is important to understand your options when considering rolling over assets from an employer-sponsored retirement plan into an individual retirement plan (IRA) or from one IRA to another. Please review the advantages, disadvantages, considerations, and disclosures.

Comprehensive Wealth Management, LLC does not offer tax advice. Please consult your CPA for specific tax questions.

Sources:

¹ Broom, Douglas. "Having Many Careers Will Be the Norm, Experts Say." Weforum.Org, 2 May 2023, www.weforum.org/stories/2023/05/workers-multiple-careers-jobs-skills/#:~:text=The%20research%20found%20that%20workers,say%20the%20data%20is%20unreliable. Accessed 11 Feb. 2025.

² Zook, David. "How Do Retirement Plans for Private Industry and State and Local Government Workers Compare?" U.S. Bureau of Labor Statistics, 10 Jan. 2023, www.bls.gov/opub/btn/volume-12/how-do-retirement-plans-for-private-industry-and-state-and-local-government-workers-compare.htm. Accessed 11 Feb. 2025.

³ Sullivan, John. "How Many Investment Options Are in the Typical (Large) 401k Plan?" 401k Specialist, 19 Jun. 2019, 401kspecialistmag.com/how-many-investment-options-are-in-the-typical-401k-plan/#:~:text=An%20updated%20study%20from%20BrightScope%20and%20the%20Investment,a%20mix%20of%20equity%2C%20bond%2C%20and%20target-date%20funds. Accessed 11 Feb. 2025.