As an employee, there is a good chance you’ll have more than one 401(k) plan available to you throughout your career. The good news is that you don’t have to struggle to maintain multiple plans across numerous former employers—you have options. In fact, you have four choices of what to do with an old 401(k)—three of which I approve, and one option that I never recommend.

First, you can leave it where it is; however, this option depends on your balance. If your 401(k) balance is less than $1,000, the plan administrator will likely close the account and mail you a check. If you have between $1,000 and $5,000, the plan administrator will likely roll your assets into an IRA, while accounts with more than $5,000 can remain intact.

Your second choice is to roll your 401(k) to your new employer’s plan. Almost every 401(k) allows for a rollover of pre-tax funds. If you have Roth 401(k) assets, you may be able to transfer that balance if your new employer’s plan offers a Roth 401(k) that allows transfers; otherwise, you’ll have to transfer Roth 401(k) assets to a Roth IRA, which brings us to our third option.

You can roll over your 401(k) to an IRA. Provided you do a Trustee-to-Trustee rollover, or direct rollover, so that you never take possession of the funds. This should eliminate the need for your former employer to withhold any tax and prevent any early withdrawal penalties. Most often I recommend that you consolidate your previous 401(k) into your current employer’s plan. While the investment options are limited within a company-sponsored retirement plan, the fees can be reasonable, and the assets will have broad protection against creditors. Depending on the plan’s design, you may be able to access funds as early as age 55, and you can delay required minimum distributions if you are still working after age 72.

If you choose to roll your previous employer’s 401(k) into an IRA, be aware that the rollover is in cash, meaning your investments will not transfer in kind. You’ll be starting over to build your asset allocation, and you’ll be responsible for researching and selecting the investments to use. Remember, some 401(k) plans negotiate lower institutional fees for funds used in plans or use proprietary investments that are not available in the market. You’ll have to decide if you want to invest your balance all at once, or if you will dollar cost average the cash into the market. If the market is still hitting all-time highs, this may be a very difficult decision and will require evaluating your other investments and savings. It will also be up to you to determine if you need an allocation to bonds for Ten Year Rule liquidity.

These decisions can be overwhelming for the average investor—much less someone who is learning a new position and company dynamics. Having a financial adviser manage the IRA can be beneficial, especially if you’re investing in individual stocks or exchange-traded funds. You may want to avoid mutual funds as you may find yourself paying management fees to the fund manager and your financial adviser.

Oh, that final fourth option—the one I do not recommend? You can cash out your 401(k), take your money and run. You will owe ordinary income tax on the withdrawal and possibly a 10 percent early withdrawal penalty if you are younger than 59 ½. If you cashed out a $50,000 balance, you’d likely owe around $12,000 in federal tax, $3,000 in state tax, and $5,000 in penalties, leaving you with $30,000. It’s just not worth it.

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William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a Certified Financial Planner™ professional.


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