What Should I Do With My Old 401(k)?February 14, 2018
- Whether you’re changing jobs or retiring makes a difference in what you consider doing with your old 401(k).
- If you’re pleased with your employer’s plan, there may be no reason to change.
- Choosing to roll old 401(k) assets into an IRA or your new employer's plan can provide advantages, including flexibility.
- There are immediate tax consequences if you decide to cash out an old 401(k).
You have four options for what to do with an old 401(k) account. “What’s right for you depends on whether you’re changing jobs or retiring from your career, as well as your financial circumstances and long-term goals,” says David Gonzalez, CFP®, lead financial planner with T. Rowe Price. Keep in mind that preserving the tax benefits of your retirement account when you leave your job may substantially improve your ability to build wealth over the long term. You can choose from any of the following options:
1. Leave your assets where they are
If the plan allows, you can leave the assets in your former employer’s 401(k) plan where they can continue to benefit from any tax-advantaged growth. Find out if you must maintain a minimum balance or if there are any fees for leaving your assets in the plan, and be familiar with the plan’s distribution provisions.
2. Roll your assets into a new employer plan
If you’re changing jobs, you can roll your old 401(k) account assets into your new employer’s plan (if permitted). This option maintains the account’s tax-advantaged status. If you are still saving for retirement, it may be convenient to consolidate your old 401(k) assets into the new plan. As with your old plan, your new 401(k) typically will allow penalty-free withdrawals if you leave the workforce after you’ve reached age 55 (income taxes still apply). Find out if your new plan accepts rollovers and if there is a waiting period to move the money. Also, review the differences in investment options and fees between your old/new employer's 401(k) plans.
3. Roll over your savings to an IRA
If you’re looking for a wider variety of retirement investment options and the potential for tax-advantaged growth, you can roll your old 401(k) into an IRA. In addition, you will have greater flexibility over access to your savings (although income taxes may apply, along with early withdrawal penalties, if you are under age 59½).1 Also, consolidating multiple retirement accounts into an IRA can make it easier to manage your retirement assets. Review the differences in investment options and fees between an IRA and your old/new employer's 401(k) plans.
4. Cash out your assets
Cashing out your old 401(k) may have significant financial consequences. Not only are those funds considered taxable income and subject to an immediate tax withholding, but you also may be subject to a 10% early withdrawal tax penalty if you cash out before age 59½.1 In addition, the amounts you withdraw will lose the potential for tax-deferred growth unless you do a direct rollover within 60 days.
|Here’s the information you need to help make the right choice for your situation.|
|1. Leave your assets where they are
|2. Roll your assets into a new employer plan
|3. Roll over your savings to an IRA
|4. Cash out your assets|
Choosing the best option for your situation
How to best proceed depends on your personal circumstances. “If possible, choose an option that allows you to continue to benefit from your savings’ tax-advantaged status and preserve and increase the growth potential of your wealth,” says Gonzalez.
There are other important factors to consider when deciding between an employer-sponsored plan and an IRA, including fees and expenses, available services, protection from creditors, and special tax considerations for employer stock. Please consider consulting with a tax advisor.
1 Certain exceptions apply.
2 Depends on employer plan provisions.
This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments or investment management. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.
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- Learn more about your options for your old 401(k).