Individuals have four choices with the 401(k) account they accrued at a previous employer.²

Choice 1: Leave It with Your Previous Employer

You may choose to do nothing and leave your account in your previous employer’s 401(k) plan. However, if your account balance is under a certain amount, be aware that your ex-employer may elect to distribute the funds to you.

There may be reasons to keep your 401(k) with your previous employer —such as investments that are low-cost or have limited availability outside of the plan. Other reasons are to maintain certain creditor protections that are unique to qualified retirement plans or to retain the ability to borrow from it if the plan allows for such loans to ex-employees.³

The primary downside is that individuals can become disconnected from the old account and pay less attention to the ongoing management of its investments.

Choice 2: Transfer to Your New Employer’s 401(k) Plan

Provided your current employer’s 401(k) accepts the transfer of assets from a pre-existing 401(k), you may want to consider moving these assets to your new plan.

The primary benefits of transferring are the convenience of consolidating your assets, retaining their strong creditor protections, and keeping them accessible via the plan’s loan feature.

If the new plan has a competitive investment menu, many individuals prefer to transfer their account and make a full break with their former employer.

Choice 3: Roll Over Assets to a Traditional Individual Retirement Account (IRA)

Another choice is to roll assets over into a new or existing traditional IRA. It’s possible that a traditional IRA may provide some investment choices that may not exist in your new 401(k) plan.⁴

The drawback to this approach may be less creditor protection and the loss of access to these funds via a 401(k) loan feature.

Remember, don’t feel rushed into making a decision. You have time to consider your choices and may want to seek professional guidance to answer any questions you may have.

Choice 4: Cash out the account

The last option involves cashing out the account entirely. However, this choice triggers ordinary income taxes on the full balance.
If you are under age 59½, you also pay a 10% early withdrawal penalty. In addition, employers often withhold 20% of the balance to prepay expected taxes.

Understand the Tax Impact and Penalties

Carefully evaluate the tax consequences before cashing out a retirement plan. Beyond the early withdrawal penalty, you also lose significant tax-deferred growth potential. For example, withdrawing $10,000 today can significantly reduce long-term retirement savings growth.

Consider the Opportunity Cost of Early Withdrawal

Keeping funds invested allows continued tax-deferred compounding over time. For instance, $10,000 growing at an average of 8% could exceed $100,000 over 30 years. Therefore, early withdrawals often create substantial opportunity costs that reduce future financial security.

Required Withdrawals and Tax Rules

In most cases, you must begin required minimum distributions at age 73. These withdrawals apply to 401(k) plans and similar defined contribution accounts. Additionally, the IRS taxes all distributions as ordinary income. If taken before age 59½, withdrawals may also trigger a 10% federal penalty. FINRA.org

Loan Rules and Additional Considerations

A 401(k) loan converts into a taxable distribution if you fail to repay it. This situation creates income taxes and potential early withdrawal penalties. If you change jobs or lose employment, remaining loan balances become immediately due.

IRA Rules and Contribution Guidelines

Traditional IRA owners must also begin required minimum distributions at age 73. However, individuals may continue contributing past age 70½ if they meet earned income requirements. Again, early withdrawals before age 59½ may trigger additional tax penalties.

Important Disclosure and Guidance

This example uses hypothetical assumptions for illustrative purposes only. It does not represent any specific investment or guaranteed outcome. Therefore, always consult qualified tax or legal professionals for personalized guidance.