What to do with a 401(k) from an old job: How to roll over your retirement account the right way


You finally landed your dream job. Congratulations!  But as you head off to greener pastures, make sure you didn't forget something along the way — like your old 401(k). 

With Social Security's funding for future generations currently up in the air, it's more important than ever to set aside a nest egg of your own. Your 401(k) can be the best place to build one since the money you stash there comes straight out of your paycheck and your employer may offer matching funds.

If you had a 401(k) at your last job, you have three options: cash out, do nothing or roll that money over and transfer it to an independent retirement account — known as an IRA — or a 401(k) at your new job.

Here's what to consider:

(Don't) take the money and run 

Avoid cashing out your savings at all costs. Sure, it may be tempting to pocket all that money and take a vacation, buy a car or splurge in myriad other ways. But now more than ever, you need to resist.

If you cash out your old 401(k) before you turn 59 1/2 years old, that money is usually subject to a 10% penalty on top of regular income taxes. What's more, since you contributed the money in pre-tax dollars, once you withdraw those funds, the IRS considers that money taxable income. 

If you had lots of money saved up, you may find yourself in a higher tax bracket as a result of the lump-sum payout as well. That means Uncle Sam will get an even bigger chunk of what should have been your retirement money.

Like most financial rules there are some exceptions on early withdrawal fees. But you need to be in a verifiable rough spot  such as being disabled or having high medical bills  to avoid paying a penalty.

Don't do it. It's just not worth it. Not only are you missing out on the compounding power of your money, you're also getting taxed big time. 

Leave it in your old 401(k)

If you forget about your 401(k), it will probably be okay — for a while anyway. But, like many things in life, if you don't take action someone else will — and you may get a sub-optimal result. 

If you have less than $1,000 in your account, plans are allowed to send you a check for that money, which can trigger taxes and withdrawal fees. 

If you have less than $5,000 in your account and don't indicate what to do with that money, more than half of all plans will move your funds to an IRA of their choice. What's more, because those plans tend to choose conservative investments and administrative fees can easily run $100 per year, your account balance may decrease over time, according to US News & World Report.

The losses add up quickly. Because of the fees associated with an IRA, $1,000 forced out of an employer's 401(k) and transferred to an IRA could be whittled down to $0 in just 9 years, according to a report from the Government Accountability Office. If you put that same $1000 in a low-cost, target-date plan, it would be worth $2,708 after 30 years.

If there is more than $5,000 in your account, it will sit there. That's fine if your plan has a good selection of low-cost, target date funds. But if the company plan has high fees, that can hurt you over the long run. It's best to call and ask exactly what fees you are being charged before you decide what to do.

Roll over

You have good money that can be lost and as well as future returns you'll never see if you neglect your 401(k). 

Often the best thing to do once you've left a job is to roll that dog over. 


Whether you put the funds in an IRA or your new employer's 401(k), make sure your money keeps working for you.

Holding your retirement funds in an IRA gives you more flexibility than a 401(k), since you are allowed to withdraw your funds for qualified home purchases or educational expenses, among other things, without penalty.

Transferring your money into your new employer's 401(k) plan, on the other hand, can give you benefits such as lower fees and transaction costs, Bankrate reports.

Whichever route you choose, be mindful about your decision. Think of your 401(k) as a little pup. It is going to keep growing and be loyal and rewarding to you — so long as you don't leave him behind.

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