Choices for Your 401(k) at a Former Employer
One of the common threads of a mobile workforce is that many individuals who leave their jobs are faced with a decision about what to do with their 401(k) account.¹
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 choice is to simply cash out of the account. However, if you choose to cash out, you may be required to pay ordinary income tax on the balance plus a 10% early withdrawal penalty if you are under age 59½. In addition, employers may hold onto 20% of your account balance to prepay the taxes you’ll owe.
Think carefully before deciding to cash out a retirement plan. Aside from the costs of the early withdrawal penalty, there’s an additional opportunity cost in taking money out of an account that could potentially grow on a tax-deferred basis. For example, taking $10,000 out of a 401(k) instead of rolling over into an account earning an average of 8% in tax-deferred earnings could leave you $100,000 short after 30 years.5
FAQs: What to Do With an Old 401(k)
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When you leave an employer, you generally have four options for your 401(k): leave it with your former employer, transfer it to a new employer’s plan, roll it over into an IRA, or cash it out. Each option has different tax, investment, and planning implications. A wealth advisor can help determine which choice best aligns with your long-term financial goals.
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Leaving your 401(k) with a former employer may make sense if the plan offers low-cost investments, unique options, or strong creditor protections. However, many individuals become disconnected from old accounts, which can lead to neglected investment management over time.
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Yes, if your new employer’s 401(k) plan accepts rollovers, you may be able to transfer your old account. This option allows you to consolidate retirement savings, maintain creditor protections, and potentially retain access to plan loan features, depending on the plan rules.
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Rolling a 401(k) into a traditional IRA can provide broader investment choices and greater flexibility. For many investors, this allows for a more customized investment strategy. However, IRAs may offer less creditor protection than employer-sponsored retirement plans.
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A properly executed rollover from a 401(k) to another qualified retirement account—such as a traditional IRA or another 401(k)—is typically not a taxable event. Mistakes in the rollover process, however, could trigger taxes or penalties, which is why professional guidance can be valuable.
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Cashing out a 401(k) is usually the most costly option. The distribution is generally subject to ordinary income taxes, plus a 10% early withdrawal penalty if you are under age 59½. Additionally, you lose the long-term benefit of tax-deferred growth.
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A Glastonbury-based wealth advisor, such as Atlantic Wealth Advisors, can help evaluate your 401(k) options in the context of your broader financial plan. This includes tax considerations, investment alignment, retirement goals, and strategies to simplify and optimize your retirement savings.
1. In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.
2. FINRA.org, 2026
3. A 401(k) loan not paid is deemed a distribution, subject to income taxes and a 10% tax penalty if the account owner is under 59½. If the account owner switches jobs or gets laid off, any outstanding 401(k) loan balance becomes due by the time the person files his or her federal tax return.
4. In most circumstances, once you reach age 73, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA). Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. You may continue to contribute to a Traditional IRA past age 70½ as long as you meet the earned-income requirement.
5. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2026 FMG Suite.
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