Options for Old 401k Accounts

Photo by nicolas_gent

From the June 2011 newsletter:

If you have ever switched jobs, you probably have more than one old 401k (or 403b) account with past employers, with the occasional unexpected statement as your only reminder that they even exist. You suspect just leaving it there is not what you should be doing, but what is the best strategy with old 401k accounts?

When leaving a job and starting a new one, you generally have four options with your old 401k (exceptions always apply):

  1. Leave it there.
  2. Transfer it to your new 401k.
  3. Roll it over to a Rollover IRA.
  4. Roll/convert it to a Roth IRA.

What do I do? I’ve generally rolled my old 401k accounts to a Rollover IRA as soon as I leave. I do this mainly for the freedom to buy the investments that I want, which are usually lower-cost and a better fit for my retirement portfolio. Also, I keep the option to convert to a Roth in the future. However, there are good reasons to choose some of the other options.

Especially if your 401k is your sole investment account, transferring your old one to your new job keeps things very simple. You only have to worry about managing one account. Since you are limited to the investment choices in your new 401k, this is a good option for simplicity as long as those new investment choices are decent.

An advanced option is to roll your old 401k to a Roth IRA (doing a Roth conversion in the process). Since this is just a combination of rolling it over to a Rollover IRA and then converting it to a Roth, you should only consider this if you’ve decided to do both steps anyway. Remember that doing this triggers income taxes, just like a regular Roth conversion would.

And if you are still undecided, leaving it there is a perfectly fine strategy as you figure out what to do next. And it’s also a good temporary option if you’re just waiting for your new job to start, or waiting for the next calendar year to do a Roth conversion.

Another factor you may consider is that 401k’s and IRAs can have differing asset protection features. If this is a critical feature for you, make sure to consult an attorney.

One option I intentionally left out is to withdraw the funds, incurring income taxes, and penalties for those less than retirement age. Although this could be an emergency source of cash, it is not a recommended option. Really, do one of the other options.

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