My mom and dad spent 20+ years working at the same company. Back then, changing jobs was a rare occurrence, and often something that was frowned upon. Nowadays, however, it’s normal, and actually encouraged, for Gen Z to change jobs every couple of years.
For early career Gen Z’s, the average company tenure is just 1.1 years (according to Fortune). With each change of company comes a new employer sponsored retirement plan. By 26, someone could have up to 5 401(k)s.
So what do you do with your old 401(k)?
What Happens to Your 401(k) When You Leave a Job?
Your old 401(k) doesn’t just disappear when you leave an old job. The money is still yours; you just can’t keep contributing to that employer plan anymore. When you part ways with an employer, you have a couple options on what to do with your 401(k).
Option 1: Leave It With Your Old Employer
If your balance is over $5,000, you can leave your old retirement account where it is.
Pros:
- No immediate decision needed
- No tax consequences
- Able to keep retirement money invested
Cons:
- You can no longer contribute towards this account
- You may have limited investment options
- Harder to keep track if you change jobs multiple times
- Administrative fees may be high
Leaving your 401(k) with your old employer can buy you some time until you figure out what to do with it, but as you change jobs more frequently, it can become a hassle to have multiple account locations.
Option 2: Roll It Over Into Your New 401(k)
If your new employer allows it, you can roll your old 401(k) into your new 401(k) plan.
Pros:
- Consolidate accounts
- No taxes owed (if direct rollover)
Cons:
- Potentially limited investment choices
- Potentially higher fees
Note: If your old plan sends your rollover check made to you instead of your new plan administrator, you will have 60 days to deposit funds into the new retirement account, or face early withdrawal penalties. They will also withhold 20% of your balance in taxes.
Option 3: Roll It Into an IRA
You can roll your old 401(k) into a Traditional IRA (or Roth IRA, depending on 401(k) account type).
Pros:
- More investment options
- Potentially lower fees
- Greater control
- Consolidate multiple 401(k)s
Cons:
- Complicate Backdoor Roth strategy (if in Traditional IRA)
- Loss of creditor protection
Note: Similar to a 401(k) rollover, you may be subject to early withdrawal penalties if done incorrectly. Keep in mind, a rollover to a Traditional IRA will trigger pro-rata for future backdoor roth contributions.
Option 4: Withdraw the Money
For the purpose of listing all possible options, you could withdraw the funds.
Pros:
- Immediate access to cash
Cons:
- Pay income taxes in withdrawal year
- Penalized 10% for early withdrawal
How to Decide What to Do With an Old 401(k)
If you’re changing jobs, or have prior 401(k)s, you have a couple options. You’ll want to evaluate plan fees, investment options, and your current and future tax situation to decide which option is best for you.
Conclusion
With this next generation of workers expected to change jobs more frequently, that means more 401(k)s could be forgotten. Being intentional with these accounts now will set you up for long-term success.
Before you move on to your next job opportunity, make a plan for your old 401(k).