Retirement savings  |  march 21, 2023

Advantages and Considerations of the Four Options for Your Old 401(k)

Preserving the tax benefit improves your ability to build wealth.


Key Insights

  • Keeping the money in your old employer’s plan or moving it to a new employer’s plan gives you access to that plan’s features.

  • Choosing to roll old 401(k) assets into an individual retirement account can provide access to a wider array of investments and increased flexibility.

  • Cashing out a 401(k) can have immediate tax consequences and penalties.

Judith Ward, CFP®

Thought Leadership Director

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, and understand the plan’s fees, investment options, and other provisions, especially if you may need to access these funds at a later time.

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. Find out if your new plan accepts rollovers and if there is a waiting period to move the money. If you have Roth assets in your old 401(k), make sure your new plan can accommodate them. Also, review the differences in investment options and fees between your old and new employers’ 401(k) plans.

3. Roll over your assets to an IRA

For more retirement investment options and to maintain the tax-advantaged status of the account, roll your old 401(k) into an individual retirement account (IRA). You will have greater flexibility over access to your savings (although income taxes may apply, along with early withdrawal penalties, if you don't directly transfer the funds and are under age 59½).1 Before-tax assets can roll over to a Traditional IRA while Roth assets can roll directly to a Roth IRA. Review the differences in investment options and fees between an IRA and your old and new employers’ 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 may also be subject to a 10% early withdrawal tax penalty if you cash out before age 59½.1 Additionally, withdrawals will lose the potential for tax-deferred growth.

“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 Ward. Other important factors to consider include fees and expenses, available services, protection from creditors, and special tax considerations for employer stock. Please consider consulting with a tax professional.

Advantages and Considerations of the Four Options

Here’s a snapshot of the information you need to help make the right choice for your situation.

1Certain exceptions apply.
Depends on employer plan provisions.
3The SECURE 2.0 Act of 2022 changed the RMD age to 73 for individuals who turn age 72 on or after January 1, 2023. The new law also provides that the RMD age will change again to 75 in 2033.

Important Information

This material has been prepared for general and educational purposes only. This material does not provide recommendations concerning investments, investment strategies, or account types. It is not individualized to the needs of any specific investor and is not intended to suggest that any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. 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 tax professional regarding any legal or tax issues raised in this material.

All investments involve risk, including possible loss of principal.

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