What Are My Options for an Old 401(k) or 403(b)?

Option 1: Roll Over the Funds to Your New Employer’s Plan

If your new employer offers a 401(k) or 403(b), it’s worth talking with someone from the human resources department to learn whether the new plan will accept a rollover from your previous employer’s plan. If the answer is yes, consolidating your old retirement plan into the new one can be a great option that simplifies your finances without disrupting your progress toward your financial goals. You can continue investing in the new 401(k) or 403(b) and take advantage of your new employer’s match if one is offered. 

Option 2: Roll Over the Funds to an IRA

If your new employer does not offer a retirement plan or if their plan does not accept rollovers, you can roll over the funds from your previous 401(k) or 403(b) to an individual retirement account (IRA) instead. This option gives the most flexibility in your investment choices and tends to have lower fees, but IRAs also have lower maximum contribution limits than 401(k)s and 403(b)s. The maximum contribution limits do not apply to rolled-over funds from a previous retirement account, but they will apply to all new income invested in the account. Depending on your financial situation, you may also consider converting your pretax funds into a Roth IRA, which will require you to pay taxes on the converted amount upfront but allow tax-free withdrawals when you retire. If you decide a Roth conversion is not the best fit for your situation, you can roll over the funds to a traditional IRA instead. 

Option 3: Keep the Funds in Your Previous Employer’s Plan

Some employers allow previous employees to keep their 401(k) or 403(b) accounts after leaving the company. This option is convenient because it requires no immediate action and allows your funds to continue to benefit from tax-advantaged growth, but leaving your old retirement plan alone is not always ideal. You will no longer be able to contribute to the account, and you may be limited by the investment options included in the old plan. Moreover, if you take this approach every time you change jobs, you may end up juggling numerous retirement accounts at different institutions with different logins, investment options, and balances, making it more difficult to get a comprehensive view of your finances and to run projections for how much you will have in retirement. Some investors have even reported forgetting about or losing track of old retirement accounts, collectively leaving more than $1 trillion in forgotten assets. To avoid putting yourself in this unfortunate situation, it is a good idea to avoid unnecessary complexities by keeping your nest egg in a select few accounts that you or a financial professional can monitor regularly.

Option 4: Cash It Out

Cashing out your old 401(k) or 403(b) is another possibility, but it should only be considered as a last resort in dire financial circumstances. When you cash out your pretax retirement plan—in addition to missing out on tax-advantaged investment growth and potentially jeopardizing your future retirement—you will likely incur taxes and an early withdrawal penalty that wipe out any growth the investment may have accrued or even leave you with less than your initial contribution. Except in a few specific circumstances (e.g., you are leaving your employer after age 55 or you are terminally ill), money withdrawn from a 401(k) or 403(b) before you are 59½ triggers a 10 percent early withdrawal penalty on top of your normal income tax rate. If you are considering this option, consult with a financial advisor to ensure you have explored all other possibilities before finalizing your decision.