Got an Old 401(k)? Here’s What to Do With It

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Not sure what to do with an old 401(k)? Learn about your options, from keeping it where it is to rolling it into an IRA or new 401(k), and avoid costly mistakes. [[{“value”:”

Not sure what to do with your 401(k) from a job you left? I recently rolled over an old 401(k) into my individual retirement account (IRA), which was surprisingly easy. I love that I can choose investments I like, and it’s satisfying to see all my lovely retirement savings in one place.

But you have several other options. The one that’s right for you might depend on where you work now, whether you have access to a (different) 401(k), and how much you like (or dislike) your old retirement plan. The one thing you don’t want to do? Forget about it.

If you’re not sure what to do with that old 401(k), let’s discuss your options.

Keep it where it is

The first option is also the easiest. Even after you leave an employer, you can continue to use the 401(k) right where it is. You can buy and sell stocks, certificates of deposit (CDs), bonds, or any other investment opportunities available in the plan. The only thing you can’t do is add more money to the account.

You’ll also keep paying any fees that plan charges, and you’re limited to buying investments available in that plan. So if you love a certain index fund and the plan doesn’t give you access to it, you’re out of luck.

If you moved into a consultant role or to a company that doesn’t offer a 401(k), leaving the account right where it is is a viable option.

Roll it into an IRA

When I left my full-time role, I went back to freelancing. That means I don’t have access to a 401(k) — though freelancers can set up a Solo 401(k). So I rolled my old 401(k) into my IRA, which lets me buy the investments I want but doesn’t charge the same fees.

You can roll an old 401(k) into a traditional or Roth IRA — but there are tax implications if you roll over a non-Roth 401(k) into a Roth IRA. Specifically, your funds will be subject to income taxes.

This is because contributions to a traditional 401(k) are made pre-tax, meaning taxes were deferred. When you convert these funds to a Roth IRA, which grows tax-free and allows for tax-free withdrawals in retirement, the IRS requires that you pay taxes on the amount rolled over as if it were regular income.

If you don’t have access to a 401(k) or if you like your IRA account better than your new 401(k), this is the way to go. Just remember if you roll into a Roth, you’ll pay taxes. Rolling from a 401(k) to a traditional IRA does not create a taxable event.

Need a new IRA? Check out our review of the top IRA accounts.

Roll it into a new 401(k)

If you land a new job and have access to another 401(k), you can roll that old account into your new 401(k). This puts all your retirement savings in the same bucket, making it easier to manage. Rolling your 401(k) over does not create a taxable event, so you won’t have to worry about paying Uncle Sam.

If you like your new company’s plan (and the investment options) and want to keep your retirement planning simple, rolling it over is the way to go.

Start a business

The IRS allows you to roll over your 401(k) to start a business in an arrangement called “Rollover as Business Start-up” or ROBS. To do this, you’ll need to create a C Corporation business and can then purchase stocks in the business.

This isn’t a great idea for most people, as it impacts your retirement savings. The IRS even notes that this arrangement has a high failure rate, so proceed with caution.

The big mistake to avoid

Once you roll your 401(k) over, it rolls as a cash balance, which means you have to remember to go into your IRA or new 401(k) and purchase investments. Otherwise, it’ll just sit there as cash doing nothing except losing value due to inflation.

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