December 9, 2023

We’ve become a job-changing nation, which means many of us are wondering what to do with our old 401(k) plans after we quit our jobs, change careers, or transition to self-employment.

That’s why we asked Kendall Meade sophiewhat today’s job switchers should do with their old 401(k) accounts.

“There’s no right or wrong answer about what to do with your old 401(k),” Mead told us. “You can leave it where it is, roll it into your new 401(k) plan, or even roll it into an IRA. To help make this decision, you need to evaluate how much you pay in your current plan versus what you pay in your new plan or an IRA. You also need to evaluate the investment options available.”

Since we don’t know the fees or investment options associated with your 401(k), we can’t give you a definitive answer on what to do with your account if you change jobs. That’s why we asked Meade to help us narrow down the pros and cons of each potential option.

Whether you’re keeping your previous employer’s plan, transferring your plan to your current employer, or rolling your 401(k) plan into an IRA, here’s what you need to know — including how you can decide which option is best for you.

Keep your plan with your former employer

In most cases, you should be able to keep your 401(k) plan in place — and in some cases, that might be the right decision. “You may like the investment options in your current plan,” explains Meade, “and the fees may be reasonable.”

Keeping your 401(k) plan with your current employer doesn’t require any extra work, which is another advantage. On the other hand, Mead told us, some employer-sponsored retirement plans charge more for former employees, which means choosing to stay could cost you money.

If you change jobs regularly, you’ll also need to keep track of your old 401(k) plan. Having multiple retirement accounts is always a bit more complicated than having one, especially if you’re interested in rebalancing your portfolio as the market changes or your risk tolerance changes.

“Keeping up with multiple accounts has become more difficult,” Meade said.

Transfer your plan to your current employer

If you find a new job that offers an employer-sponsored retirement plan, you may want to transfer your old 401(k) plan to the new one. “Moving funds into your current employer’s plan allows you to keep everything in one place,” Meade explains.

While transferring your plan to your current employer is an easy way to address the question of what to do with your 401(k) if you change jobs, you still want to compare costs before transferring. “Your current employer’s plan may offer lower fees than your original plan,” Meade says, “but you may still end up paying more than you would have if you put the money into an IRA.”

You’ll also want to take a close look at investment options tied to your current employer-sponsored retirement plan. For example, if the funds available to employees have high expense rates — or if the plan doesn’t allow you to choose sustainable investments that align with your values ​​– you may want to roll your old 401(k) plan into an IRA.

Does that mean you shouldn’t invest in your current employer’s plan? unnecessary. You can still participate in your current employer’s 401(k) plan, especially if it’s a company match. But you might be able to get more out of your retirement savings by putting your old 401(k) into an IRA with lower fees and more investment options.

Deposit your 401(k) into an IRA

Putting an old 401(k) into an IRA is a very popular option, in part because it gives you the most freedom. “With an IRA, you choose your investments,” Meade explains. “You’re not limited to what an employer-sponsored retirement plan offers, and you can choose investments with lower expense ratios and fees.”

Of course, you’ll have to decide whether to put your 401(k) in a traditional IRA or a Roth IRA, and each option has its pros and cons. Both 401(k) plans and traditional IRAs allow you to deposit pretax money into your retirement account, giving you the opportunity to invest more now and pay taxes later.

However, a Roth IRA is funded from after-tax funds. That means you’ll need to pay taxes on the money in your old 401(k) — and even though the tax bill isn’t due until next April, some people may have trouble setting aside the necessary cash.

That said, Roth IRAs offer considerable benefits. As long as the account has been open for at least five years, not only can you withdraw your contributions at any time without penalty, but you can also withdraw some of the account earnings – your investment growth, in other words – if you become a parent, become a homeowner or use this A sum of money to pay for qualified educational expenses.

What you do with your old 401(k) after you change jobs is up to you. But by understanding the pros and cons of each option, you’ll be more likely to make an informed decision.