4 Options to Give Your Old 401(k) a Fresh Start

When workers change jobs, many forget about their old employer’s 401(k) or decide to cash out their retirement savings, paying taxes and often penalties in the process. The Wall Street Journal recently reported about 30% of workers leaving jobs elect to cash out their 401(k) accounts and pay taxes – and often 10% penalties1.

Is that the smartest option? In certain situations, of course. But, it's important to know there are other options, including ones that will save you money in the short and long-term.

Option #1: Move to your new employer's retirement plan

An excellent option for an old retirement account is to rollover the account to a new employer 401(k). This option avoids taxes and penalties and allows tax-deferred savings to remain invested for retirement. Your contributions to the new 401(k) will combine with savings from the old plan.

One caveat is the new employer plan must accept rollovers. Most do. There will be some extra work required to make a direct rollover to a new account. Let's look at the process:

  • Contact the new 401(k) administrator for instructions on moving the old 401(k) funds to the new account (i.e., where/how to send money, account number, etc.).
  • Contact the old 401(k) administrator to request a direct rollover to the new 401(k). The former administrator will likely send paperwork to complete and return.
  • Once the old administrator has processed the paperwork, the account should transfer directly to the new account, as long as a direct rollover was elected.
  • If you receive a physical rollover check in the mail instead, you have 60 days to deposit it into the new retirement account without incurring taxes/penalties.

Option #2: Move to an IRA (Individual Retirement Account)

Moving an old employer plan to an IRA is another great way to keep savings in a tax-deferred account. This option works well if a worker no longer has access to a 401(k), or he/she wants more control and an unlimited selection of eligible investments within the account.

The first step in this process will be establishing an IRA, and then the step-by-step guide provided in option #1 will help move the old 401(k) to the new IRA.

If you decide to establish and move your account to an IRA, do your research or speak to one of our qualified professionals. Not all IRAs are created equal. Compare fees and investment options of different IRAs before deciding where to transfer your retirement savings.

Option #3: Cash out and pay penalties

As already mentioned, one option for an old 401(k) is cashing out the account entirely. When doing so, any pre-tax money in the account is subject to ordinary income taxes. Further, if a worker below age 59 ½ cashes out, he/she owes an additional 10% penalty on money withdrawn.

Option #4: Leave it be

Another option is to do absolutely nothing. Most employers do not force ex-employees to move 401(k)s after they've left. The account will remain invested, but no new savings added. There are disadvantages of leaving an account with an old 401(k) administrator. Ongoing fees and limited or poor investment options are two potential cons. If the worker already has multiple investment accounts, leaving the 401(k) means another account to manage.

If fees are low and investment options plentiful, leaving the account with the current 401(k) administrator is a fine solution.


Determining what to do with an old 401(k) is an important decision, but it does not have to be complicated. Keeping 401(k)s in qualified retirement accounts ultimately saves on taxes and penalties in the short-run, while keeping hard-earned savings invested for the long-run.

To learn more or to schedule a free consultation with one of our experienced wealth advisors, complete this contact form or call 509.735.0484.


1 The Wall Street Journal, Automatic 401(k) Transfers Gain Traction.