What Should I Do With My Old 401K?

Q. I will be changing jobs and I have a small 401K. Should I leave it there or move it to my new employer’s plan?
— Working

A. You have several options for your 401K.

It will partly depend on the balance in the account.

If the account has less than $1,000, your employer is permitted to cash out the account when you leave the company, said Marnie Aznar, a certified financial planner with Aznar Financial Advisors in Morris Plains, New Jersey.

She said you should be sure to fill out the necessary paperwork to roll the account over and avoid having it cashed out prior to your departure.

If the balance of your account is large enough — typically at least $5,000 — you may be able to leave the 401K with your old company, she said.

But there are two other good options to consider.

Aznar said you can either roll the balance into your new company’s 401K plan or roll the 401K into an IRA rollover with the custodian of your choosing. (This guide to common retirement lingo might be helpful as you navigate this decision.)

You also have one bad option: Take the money and run. That choice would mean the money is taxed at ordinary income tax rates and would probably be subject to penalties.

Not a good choice, Aznar said.

She said if you think that the investment options in your new company’s 401K plans are good and the cost structure of the new plan is competitive, that would be the simplest and most efficient approach.

If, however, you do not think that the investment options in the new 401K plan are very good and/or you believe that the underlying expenses in the new plan are high, it would be worth considering doing a trustee-to-trustee transfer of your old 401K plan into an IRA rollover, Aznar said.

“When you opt for a trustee-to-trustee transfer, there are no income tax consequences associated with making the move and you are able to choose any investment options available to you at the new custodian,” she said. “This option would give you the most flexibility from an investment perspective.”

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