What to Do With an Old 401(k): Your 4 Options

When you leave a job, you have four options for your 401(k): leave it in the old plan, move it to your new employer's plan, roll it into an IRA, or cash it out. Cashing out is usually the costliest choice. A direct rollover avoids withholding and taxes. Getting guidance on a 401(k) rollover in Chattanooga helps you compare costs, investments and flexibility before you move money.

Option 1: Leave It in the Old Plan

Simple, and some plans offer low-cost institutional funds. Downsides: limited investment choices and one more account to track. Very small balances may be forced out by the plan.

Option 2: Move It to Your New Employer's Plan

Keeps everything in one place and may allow access at 55 if you leave that employer in or after the year you turn 55. Depends on the new plan accepting roll-ins and its investment quality.

Option 3: Roll It Into an IRA

Typically the widest investment choice and easiest coordination with a retirement income plan. Consider costs, creditor protection differences and whether you plan backdoor Roth contributions, since IRA balances affect that strategy.

Option 4: Cash It Out

The distribution is taxable, a 10% penalty generally applies before 59½, and 20% federal withholding is taken off the top. This permanently reduces retirement savings.

Direct vs. Indirect Rollovers

A direct rollover moves money straight from the plan to the new account with no withholding. An indirect rollover sends you a check minus 20% withholding, and you must deposit the full amount within 60 days to avoid tax on the shortfall. Direct is almost always better.

Special Situations

Company stock in a 401(k) may qualify for net unrealized appreciation treatment, and after-tax contributions may be splittable into a Roth IRA. Review these before rolling over.

Questions to Ask Before You Decide

• What are the total costs in the old plan, the new plan and an IRA?
• Do I hold company stock with large unrealized gains?
• Do I have after-tax contributions?
• Will I retire between 55 and 59½ and need access?
• Do I plan backdoor Roth IRA contributions?

How a Rollover Fits Your Retirement Income Plan

Consolidating accounts can make withdrawals, required minimum distributions and Roth conversions easier to coordinate. The best choice is the one that fits the income plan, not just the account with the most investment options.

Key Takeaways

• Four options: leave, move to new plan, roll to IRA, cash out.
• Cashing out triggers tax, possible penalty and 20% withholding.
• Use a direct rollover to avoid withholding and the 60-day rule.
• Check for company stock and after-tax money before moving.

Frequently Asked Questions

How long do I have to roll over a 401(k)?

There is generally no deadline to roll over from a plan, but an indirect rollover must be completed within 60 days of receiving the check.

Is a 401(k) rollover taxable?

A direct rollover to a traditional IRA or another pre-tax plan is not taxable. Rolling pre-tax money into a Roth IRA is taxable as a conversion.

Can I roll my 401(k) while still working?

Some plans allow in-service rollovers, often after age 59½. Check your plan's rules.

Changing jobs or retiring? Get guidance on your 401(k) rollover in Chattanooga before you move a dollar.

This article is for educational purposes only and is not individualized investment, tax or legal advice. Talk with a qualified professional about your specific situation.