What to do with an old 401(k) from a previous employer

Leaving a job often means leaving behind an old 401(k) from a previous employer. While it may be tempting to forget about it, making the right decision about your retirement savings can impact your long-term financial security. Should you roll it over into a new account, leave it where it is, or consider a Roth conversion? Understanding your options can help you maximize your retirement savings and avoid unnecessary fees or penalties. Let’s break down the best strategies for managing an old 401(k) effectively.

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

Most employers allow former employees to keep their 401(k) accounts in the company plan. While this may be the easiest choice, it has drawbacks:

• Limited investment options – You’re stuck with the choices available in that plan.
• Higher fees – Some employer plans have administrative fees that can eat into your savings.
• Loss of access – If the plan changes or the company merges, managing your account could become more complicated.

Best for: Those who like the current investment options and low fees, and don’t mind limited control over their account.

Option 2: Roll It Over to a New Employer’s 401(k)

If your new job offers a 401(k) and allows rollovers, consolidating your old 401(k) can simplify your retirement savings.

Advantages:

• Keeps all your retirement savings in one place
• Allows you to continue tax-deferred growth
• May offer better investment options and lower fees

Disadvantages:

• Your new employer may have limited investment choices
• Some plans do not accept rollovers from old 401(k)s

Best for: Those who want to simplify their accounts and have access to a strong employer-sponsored plan.

Option 3: Roll It Over to an IRA

Moving your old 401(k) into an IRA gives you more control over your investments.

Benefits of an IRA:

• Wider range of investment choices – Stocks, bonds, mutual funds, ETFs, and more.
• Potentially lower fees – IRAs often have fewer administrative costs.
• Flexible withdrawal options – Unlike a 401(k), an IRA gives you more control over distributions in retirement.

However, rolling over into an IRA means you won’t have access to a 401(k) loan feature, and it requires active management.

Best for: Those who want more investment flexibility and lower costs while maintaining tax-deferred growth.

Option 4: Consider a Roth Conversion

A Roth conversion involves moving funds from a traditional 401(k) or IRA into a Roth IRA. This means you’ll pay taxes on the converted amount now, but your future withdrawals will be tax-free in retirement.

When Does a Roth Conversion Make Sense?

• If you expect to be in a higher tax bracket in retirement
• If you have a few years before retirement to let the funds grow tax-free
• If you can pay the taxes on the conversion without dipping into the retirement funds
• If you want to avoid required minimum distributions (RMDs) later in life

Real-Life Scenario: Meet Sarah

Sarah, 45, just left her long-time employer and has a $200,000 traditional 401(k). She expects her income to be lower this year because she took a few months off before starting a new job. After speaking with a financial advisor, she decides to roll part of her 401(k) into a Roth IRA while she’s in a lower tax bracket. This allows her to pay a lower tax rate on the conversion now and enjoy tax-free withdrawals in retirement.

Roth conversions can be complex, so it’s crucial to work with an advisor to determine the best strategy based on your income, tax situation, and retirement goals.

Option 5: Cash It Out (Not Recommended)

Cashing out your 401(k) may seem appealing, especially if you need funds, but it comes with serious consequences:

• Taxes and penalties – If you’re under 59½, you’ll owe income tax plus a 10% early withdrawal penalty.
• Lost growth potential – Your retirement savings lose years of tax-deferred compounding.
• Risking your future – Dipping into retirement savings early can create financial stress later on.

Best for: Only those in extreme financial hardship with no other options.

What’s the Best Move for You?

Choosing what to do with an old 401(k) depends on your goals, tax situation, and investment preferences. That’s where we come in! Working with a trusted financial advisor can help you determine the best strategy for maximizing your retirement savings.

At Guerra Wealth Advisors, we specialize in helping clients make smart decisions about their retirement accounts. Whether you want to consolidate accounts, optimize investments, or plan for long-term growth, we’re here to guide you.

Key Takeaways:

• Leaving your 401(k) in a previous employer’s plan may be an option, but it has drawbacks.
• Rolling it into a new 401(k) can simplify your accounts, but not all plans accept rollovers.
• An IRA rollover offers greater investment flexibility but requires active management.
• Cashing out is rarely a good idea due to taxes, penalties, and lost growth.
• Consulting a financial advisor can help you make the best choice for your future.

Let’s Make a Plan Together

Not sure what to do with your old 401(k)? Let’s chat! Schedule a free consultation with one of our advisors at Guerra Wealth Advisors, and we’ll help you make the best decision for your retirement savings.