What Should You Do with an Old 401(k)?
As a golf fanatic, I often find parallels between the game and investing. Just as a golfer can lose track of a ball after one errant swing, investors can lose sight of retirement accounts after changing jobs. In golf, a bad shot can leave you searching through the weeds for a lost ball. In retirement planning, an old 401(k) can create a similar problem if it is forgotten or left unmanaged—lost in the “tall grass” of old employers. In this article, I’ll explain what 401(k) rollovers are, when they may make sense, and what to consider before moving an old employer-sponsored retirement plan.
Employer-Sponsored Retirement Plans
Most people have access to a retirement plan through their employer. Common examples include 401(k), 403(b), and 457 deferred compensation plans. While working for a company, employees contribute to these plans and invest the funds for retirement. Some employers also offer matching contributions, such as contributing 3% when an employee contributes 6% of salary. Over time, these balances can grow significantly and, when an employee leaves the company or retires, they need to decide what to do with the account.
After separating from an employer, an employee generally has four options: leave the money in the former employer’s plan, roll it into a new employer’s plan, roll it into an IRA, or take a distribution (which may create taxes and penalties). This article focuses primarily on that third option—IRA rollovers—and the factors that can help determine whether that approach is appropriate.
Rollover Options
A rollover occurs when funds from an old employer-sponsored retirement plan are moved into another qualified retirement account, such as an IRA. When completed properly as a direct rollover, the transaction is generally non-taxable because the money remains within a qualified retirement account. The process is often straightforward and may involve a phone call, online request, or a few forms. In many cases, it is best to wait until the final paycheck and any remaining employer contributions have been deposited before initiating the rollover so the full balance can be transferred at one time.
The decision to roll funds into an IRA should be made with care, as 401(k) plans and IRAs have different rules and features. A 401(k) may offer limited investment choices and less personalized guidance, but it may also provide access to plan loans and certain protections that are not available in an IRA. An IRA can offer broader investment flexibility and more direct planning control; however, it doesn’t allow loans, and withdrawals may create tax consequences or penalties depending on the account type and the investor’s age.
An IRA can also create planning opportunities, including Roth conversions that move pre-tax money into an after-tax Roth account. This can support proactive tax planning and help align investments with the right tax buckets, but rollover decisions should consider fees, investment options, tax situation, creditor protection, loan access, and overall financial goals. IRA distributions may be taxable, and withdrawals before age 59½ may also be subject to a 10% penalty unless an exception applies. Because the rules can be complex, it is important to weigh the tradeoffs before making a move.
Another option to consider is an in-service rollover. If your plan permits it, you may be able to roll a portion of your employer-sponsored retirement plan into an IRA while you are still employed, often after reaching age 59½. This can be helpful in the years leading up to retirement, when allocation, income planning, and tax strategy become especially important. Moving funds to an IRA may provide broader investment choices and more direct planning control, which can help align the account with your retirement-income needs. Because in-service rollovers depend on plan rules and individual circumstances, they should be reviewed carefully before implementing.
Lastly, if you have IRAs in multiple places and want to consolidate them, you may be able to complete an IRA-to-IRA transfer. This can be useful when consolidating accounts, moving assets to a qualified advisor, or seeking planning and investment guidance if you do not feel comfortable managing the IRA yourself. An IRA-to-IRA transfer is generally a non-taxable event and is typically handled through account transfer paperwork. In many cases, the process is simple and smooth.
Why do rollovers matter?
People often leave old retirement accounts behind for years. Once you separate from an employer, the former employer’s plan is no longer designed to provide ongoing personal oversight of your broader financial picture. Consolidating old retirement accounts into an IRA may make it easier to track assets, coordinate tax planning, and help your advisor understand how each account fits into your overall retirement strategy.
If you have an old 401(k) or other retirement plan and are not sure what to do with it, contact our office so we can review your options together. Our goal is to help you stay organized, make informed decisions, and build a stronger financial life. Retirement should not arrive with old accounts scattered across multiple places, and your family should not have to sort through them later during an already difficult time.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
A Roth IRA conversion—sometimes called a backdoor Roth strategy—is a way to contribute to a Roth IRA when income exceeds standard limits. The converted amount is treated as taxable income and may affect your tax bracket. Federal, state, and local taxes may apply. If you’re required to take a minimum distribution in the year of conversion, it must be completed before converting.
To qualify for tax-free withdrawals, you must generally be age 59½ and hold the converted funds in the Roth IRA for at least five years. Each conversion has its own five-year period, and early withdrawals may be subject to a 10% penalty unless an exception applies. Income limits still apply for future direct Roth IRA contributions.
This material is for informational purposes only and does not constitute tax, legal, or investment advice. Please consult a qualified tax professional regarding your individual circumstances.