Old 401K Plans: Best Options for Rollover & Consolidation

If you have an old 401(k) sitting with a previous employer, you’re not alone. About one in five U.S. workers has forgotten or left behind a 401(k) from an old job. This adds up to an estimated $29.2 million forgotten accounts and $1.65 trillion in retirement savings.

If you have one of those accounts, the good news is you’ve got options. There are typically four ways you can manage it.

• Option 1: Leave It in Your Old Employer’s Plan 
• Option 2: Roll It Into Your New Employer’s Plan 
• Option 3: Roll It Into an IRA (Traditional or Roth)
• Option 4: Cash It Out (But Think Twice)

Let’s explore each one and help you figure out what’s best for your financial future.

Option 1: Leave It in Your Old Employer’s Plan

If your old 401(k) has more than $7,000, you’re typically allowed to leave it where it is. But if it’s under that amount and you don’t choose another option, your former employer might move the money for you. They could either roll it into an IRA of their choice or cut you a check (especially if it’s under $1,000).

This might be fine for the short term, especially if the plan has good investment options. But keep these risks in mind:

• You Might Forget About It: Life moves fast. Passwords get lost, contact info changes and old accounts can slip through the cracks, even if there’s real money in them.
• You Might Lose Growth Potential: When you leave a company, your old 401(k) no longer receives employer matching contributions – essentially missing out on free money that could be growing your retirement savings. Additionally, your former employer's plan might offer less competitive investment options or higher fees compared to your new employer's plan or an IRA. 
• Your Former Employer is in Control: Your former employer still sets the rules. They can change investment options, withdrawal policies or increase fees.

Bottom Line: Leaving your 401(k) where it is might work temporarily, but it’s easy to lose track of it. Make sure you monitor it regularly and understand the trade-offs.

Option 2: Roll It Into Your New Employer’s Plan

This is a good way to combine your retirement savings. However, not all employer plans allow this, so check first.

If it’s allowed, there are three ways to roll over:

• Direct Rollover: The money moves straight from your old plan to the new one. No taxes withheld, no penalties and no detours.
• Indirect Rollover: You receive a check and have 60 days to deposit the full amount into your new 401(k). But be careful: 20% is usually taken out for taxes. If you don’t pay the difference and redeposit on time, you might face taxes and penalties.
• Trustee-To-Trustee Transfer: This is similar to a direct rollover but handled electronically between institutions. It’s quick, secure and hassle-free.

After the transfer, your plan administrator can help you choose your investments and fine-tune your savings strategy.

Pro Tip: Check your new plan’s rollover policy before getting started.

Option 3: Roll It Into an IRA (Traditional or Roth)

If you want more control and flexibility, an IRA could be a great fit. You’ll usually get more investment choices and potentially lower fees than employer-sponsored plans.

Here’s how it works:

• Pick a Provider: Choose a bank, credit union or brokerage that aligns with your goals. Compare fees, services and tools.
• Choose a Traditional or Roth IRA
  • Traditional IRA: This will be tax-deferred like a 401(k). You’ll pay taxes when you withdraw.
  • Roth IRA: You pay taxes up front, but withdrawals in retirement are tax-free. If your income is too high to contribute directly to a Roth, you can still use a backdoor Roth conversion. This means you first roll your money into a Traditional IRA and then convert it. Just know you’ll owe income tax on the converted amount.
• Coordinate the Transfer: Contact your 401(k) administrator and tell them where to send the funds. You could do a direct rollover or trustee-to-trustee transfer to avoid taxes or penalties. Indirect rollovers come with risks and added complexity.

Bottom Line: Whether you go Traditional or Roth, rolling into an IRA gives you more control. Just be sure to understand the tax implications and get guidance if you need it.

Option 4: Cash It Out (But Think Twice)

Yes, you can cash out your old 401(k), but it's usually a last resort.

Here’s why:

1. Early Withdrawal Penalty: You’ll pay 10% if you’re under age 59½. 
2. Taxes: The entire amount becomes taxable income, possibly bumping you into a higher tax bracket.
3. Lost Growth: You miss out on long-term compounding, which can significantly shrink your future retirement savings.

Bottom Line: Unless it’s a financial emergency, there are better ways to access money without sacrificing your future security.

Tracking Down a Forgotten 401(k)

Old 401(k)s can get lost in the shuffle, especially during job changes, moves or name changes.

Since 2020, the job market has shifted dramatically. During “The Great Resignation ,” millions of Americans changed employers for better pay, flexibility or benefits, and some left behind retirement accounts in the process.

Capitalize estimates that the average forgotten 401(k) holds $55,400  – which means ignoring it could cost you.

Start your search with these tools:

• National Registry of Unclaimed Retirement Benefits 
• Department of Labor’s Abandoned Plan Search 
• U.S. Pension Guaranty Corp

If you leave an account unused long enough, your state’s unclaimed property department may take it over. Check MissingMoney.com or your state treasurer’s site to search for assets in your name.

Not sure where to begin? A financial consultant can help you locate missing funds and decide what to do with them.

Ready to Take the Next Step? Talk With a Financial Consultant

Managing old retirement accounts can feel overwhelming. Between taxes, rules and rollover decisions, there’s a lot to consider. There is no one-size-fits-all answer.

A financial consultant can help you:

• Find missing accounts
• Compare rollover options
• Avoid costly mistakes
• Build a plan that matches your goals

Schedule a free consultation with the Landmark Investment Center today.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This material was prepared by LPL Marketing Solutions and Landmark Investment Center.

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