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What to do with your old 401(k)
Consolidate & avoid penalties. Bonus: Backdoor Roth tips.
Bryan Hasling, CFP®
February 28, 2024
If you've ever changed jobs and have an old 401(k) left behind, what should you do with it?
If you’ve always wondered if you should take any action, this is for you.
In this piece, I’ll cover the 4 main options available, with pros and cons of each, along with a bonus topic for an advanced strategy.
Prior 401(k) Options
Option 1: Leave the account where it is
Leaving the account where it is can be a totally fine approach, under the right circumstances.
To make sure it feels right to you, you'll want to check on the following:
Fees - are the plan’s embedded fees acceptable? First, the 401(k) plan itself may charge a fee. But even more important, the available fund choices could have higher-than-normal fees. Look for ‘expense ratios’ in your choices. Anything approaching 1.0% may be on the high side.
Investments - is your account currently invested for the long-term (and not sitting in cash)?
Address & Beneficiaries - is your information (address) up to date? Do you feel confident that you’ll regularly make updates if your personal situation changes?
Option 2: Merge the account into your New Employer's Plan
If you take the less-is-more approach to accounts, this option is for you.
Most plans allow this, but it’s worth checking. In addition, you'll also want to make sure you approve of the plan's funds and fees inside.
Fees - be sure to review a) the plan’s ongoing fees, and b) the investments ‘expense ratios.’
It’s also important to note that this option preserves your ability to do backdoor Roth IRA contributions. More on this advanced detail below.
How to merge old account into your current plan:
While it’s not as simple as a few mouse-clicks, it is relatively straightforward.
For whatever reason, most 401(k) plans require you to CALL the old plan and request a transfer into the new plan.
Find the mailing address and plan ID # of your new plan.
Call your old plan administrator (on the phone) to request the rollover
From there, the old company should issue a check either to you or directly to the new company. If executed properly, it will not be a withdrawal or taxable.
Option 3: Transfer into an IRA (for self-management or professional management)
If you don’t want to merge into your new plan for whatever reason, or you simply want to hire a professional to manage your investments, this is a great option.
You would likely pursue this option if you: a) don’t like the new plan’s investments or fees, , or b) your account balance is large and you’re ready to hire a professional.
If you plan to Self-Manage, be sure that you have an investments plan that will keep you on track. Leaving it in cash in the new IRA could be worse than the high-fee funds you were trying to avoid.
If you are choosing Professional Management, make sure you understand their fees and what the investments plan is.
How to transfer into an IRA:
First, you need an open a new IRA at any custodian (your choice).
Once it's open, write down the account number.
Call the old plan administrator (on the phone) to request the rollover. They will mail a check to either you or directly to the new account.
If executed properly, it will not be a withdrawal or taxable.
Option 4: Withdraw from the account
If you're under age 59.5, you could face penalties of up to 10% of your withdrawals, in addition to potential income taxes.
That said, there are actually ways to withdraw funds (either partial or total) and not pay penalties. The IRS outlines a few ways to avoid those here.
But in general, this usually one of the last options people choose.
Bonus: Best Option to keep “Backdoor Roth” contributions open
If you are interested in - or already - making “backdoor Roth IRA” contributions, you’ll want to review the above options closely.
Choosing the wrong rollover option could affect the strategy.
Notably, to properly execute the backdoor Roth IRA strategy, you must have a $0 in total IRA balances. If this is part of your financial planning, you will not want to execute item #3 (roll into IRA).
As a loophole though (to aid the Backdoor Roth loophole), you ARE allowed to merge your prior account into a solo / individual 401(k).
So if you left your last employer to start your own business, you can now create your own 401(k) plan account and merge your old 401(k) account into it! Keeping $0 in IRA balances.
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