What Should You Do with an Old 401(k)

Jun 2, 2022 | Additional Insights, Financial Planning, Nearing & In Retirement, Saving & Investing

Have you ever been around children? If you have, you know that as children leave a room, they typically do not clean up after themselves and leave a mess of toys behind. Like most children, when people leave their place of employment, they typically leave their 401(k) retirement accounts behind. According to the Bureau of Labor Statistics, the average person born between 1957 and 1964 changed jobs a staggering 12 times before the age of 54. As a result of these job changes, many 401(k)’s were left behind unattended, unmanaged, and completely neglected. The question is, if you have changed jobs or will be changing jobs, what should you do with your 401(k)?

If you are like many people who have one or more 401(k)s spread across many plans you have a few options to choose from, including: keeping the 401(k) at your former employer (as long as the value is over $5,000), transferring the funds to your current employer’s 401(k), or rolling it over to a personal individual retirement account (Rollover IRA).  There are several factors when deciding which option is best for you. It is important to consider what investment options are available, what are the costs associated with each option, who is choosing or helping you choose the investments, and how often you pay attention to your portfolio. Who is designing the allocation, making the security selections, and implementing your rebalancing strategy if you leave your 401(k) behind? 

Typically, the most advantageous option is rolling the funds over to a personal Rollover IRA at a firm of your choosing.  This option provides the most flexibility including the option to invest in almost any individual stock, bond, exchange traded fund (ETF), or mutual fund.  The rollover option also provides the ability to control your costs since you have the option to choose any investment rather than the limited options in the 401(k) which may not include a variety of low fee investment options.  The Rollover IRA can also provide a centralized view and consolidation of all your investments with one firm and/or Wealth Advisor.  Having a Wealth Advisor managing your Rollover IRA is also advantageous because it allows you to have peace of mind knowing that someone who is aligned with your goals and objectives is always watching over your account(s) to ensure they remain invested properly while you are busy with the day to day of life.  

There are some disadvantages to transferring your old 401(k) into a Rollover IRA. Within most 401(k) plans you are allowed to borrow money and pay it back over time (with interest of course), whereas the IRA does not contain a loan provision.  Also, depending on the state that you live in, a portion of your Rollover IRA assets may not be protected from creditors since IRAs are not covered by ERISA laws like your current or former employer’s 401(k).  ERISA (The Employee Retirement Income Security Act of 1974) protects employer sponsored plans from seizure by creditors whereas IRA’s only have limited protection from creditors in case of bankruptcy.  Finally, if you have low basis company stock, you may be able to take advantage of Net Unrealized Appreciation (an advanced tax strategy) which can only be found in a 401(k).  

On the surface, rolling over your old 401(k) might seem like a monumental task, however, the process is extremely simple. First: open an IRA with your advisor or custodian if you do not already have an existing IRA.  If you made both pre-tax (traditional) and after-tax (Roth) contributions to your 401(k), you would need to open two IRAs: a Rollover IRA and a Roth IRA.  Once the account is established, contact your former employer’s plan administrator or human resources department to find out the necessary steps for a rollover, which typically involves processing the rollover via phone, plan website, or signing and submitting paperwork.  Once the process is complete the plan will either send the funds directly to your IRA(s) at your custodian or potentially send you the check(s) which you will have to deposit within 60 days into your IRA(s). An additional advantage of working with a qualified financial advisor is that they will often do all of the heavy lifting for you, taking care of each of these steps on your behalf.

If you are like many people who have old 401(k)s that you have left behind, consider speaking to a financial professional who can provide you advice based on your specific situation. The Wealth Advisors at GreenUp Wealth Management are here to help answer any related questions you or someone you know might have.


  • Mike Mitchell

    Director of Operations | Chicago, IL -- Mike Mitchell is the Director of Operations of GreenUp Wealth Management where he partners with the advisors and leadership team to provide a client-first approach to the company’s operations. For over 15 years, Mike has worked in various roles at both large and mid-sized financial services companies including as an advisor, financial planner, and most recently as Chief Operating Officer. Mike’s unique experiences allow him to see through the lens of the advisor but more importantly through the lens of the client to ensure the client experience is smooth and efficient.

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