What Can I Do With Old Retirement Accounts?

Can I still access my 401k if I leave my job? What are my options?

If you’ve been working with a large company, odds are you can save for retirement by contributing to your employer retirement accounts. These retirement accounts include plans like the 401k, 403b, and 457b. Although they have different names, they all offer tax-advantaged ways to save for retirement. But what happens when you’ve contributed to your 401k for the past ten years but leave your job before using the money for retirement? Is that money gone forever?

Thankfully no. You have three main options for what you can do with the cash in your old retirement accounts.

1. Leave it with your former employer

Some employers allow you to keep your retirement account with them even after you’ve left the company. This is the most straightforward option because you don’t have to take any action or decide what to do with the funds. This is also a great option if you want to continue to save for retirement and are satisfied with the investment choices and fees associated with the plan.

One issue with this approach is that if you aren’t satisfied with the investment choices and associated fees in the account, there are only a limited number of choices. You must choose from the limited options your employer offers, which usually have elevated fees.

Another issue is that if you want to grow that account, you can’t contribute anymore. You can only contribute to the plan if the company employs you.

The average employee stays at their job for just four years, meaning there are high odds of having 401ks at multiple employers. This can be an issue when trying to withdraw funds in retirement or because you may lose or forget previous accounts if you haven’t kept great records. Keeping track of accounts can also be challenging for your beneficiaries if you die and want to pass down your saved funds.

2. Cash it out

This option will give you most immediate access to your funds. You also have no restrictions on how you can use the cash. Once it’s converted to cash, it’s treated as cash. This is a great last option if you need funds for an emergency and you have no other funds anywhere else to cover it (like medical bills or a lawsuit).

Although we can get access to cash through this approach, it doesn’t get away scratch-free. If you take out the funds before you turn 59½ and it’s not an allowable withdrawal, you must pay a 10% penalty and income taxes. These taxes and penalties can dramatically reduce the value of the funds, especially if you are already in higher tax brackets with salary because the withdrawal is viewed as ordinary income and is taxed at your highest rate.

By cashing out your retirement accounts, you lose savings that could’ve been used in retirement and risk missing out on investment growth.

3. Roll it over

Rolling your account over looks like moving the funds from one previous retirement account to another. You can roll previous retirement funds into either your new employer’s plan or your Individual Retirement Account (IRA).

New Employer’s Plan

If your new employer allows rollovers, you can roll your old retirement account into the new one. The main benefit of doing this is that it simplifies your account management into one place. Since it’s all on one platform, you can manage and monitor your investments without digging through documents to see what you were previously invested in.

If the employer allows, you can also get access to taking a loan on your 401k for buying a home or even starting a business. If the new employer plan offers this option, you now have access to it with the old funds, even if you couldn’t do so in the previous plan. The main downside of a loan is that the loaned amount will leave your investments until it’s repaid, so you could miss out on potential investment gains.

The main reasons not to roll over into your new employer plan are that the investments in employer plans are primarily limited, have higher fees, and your employer may not allow rollovers.

IRA

You can transfer the funds from your old retirement account into a Traditional IRA or a Roth IRA. This is a popular choice because it provides more control over your investments and often a wider range of investment options than employer-sponsored plans. Managing your funds yourself also allows you to pay less in fees because you aren’t hiring someone for management.

When you want to roll it over into your IRA, you must choose which type of IRA you want to roll it into. There will be no tax implications if you roll a traditional 401k to a traditional IRA or a Roth 401k to a Roth IRA because the taxes work the same. Roth accounts are taxed on your contributions, while traditional accounts are taxed on withdrawals in retirement.

If you convert a Traditional 401k to a Roth IRA, you’ll have to pay ordinary income taxes on the amount because it’s treated as a contribution. Only do this conversion if your current tax bracket will look similar to your bracket in retirement because you won’t be saving on taxes if you were to wait to pay them.

Apart from the tax-free growth and withdrawals, another benefit of rolling into the Roth IRA is there are no required minimum distributions (RMDs). Right now, for Traditional IRAs and 401ks, you must make withdrawals starting at the latest age of 73. This can have considerable implications on retirement income and tax planning, how your social security is taxed, and the premiums you’ll have to pay for Medicare.

Summary

There are three options for what you can do with your old retirement accounts. It largely depends on your current financial obligations, tax situation, retirement income strategy, and investment preferences.