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What should you do with your 401(k) after switching jobs?

The pros and cons of each of your options

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We’ve become a nation of job-switchers, which means that a lot of us are wondering what to do with our old 401(k)s after we quit our jobs, change our careers or transition into self-employment.

That’s why we asked Kendall Meade, Certified Financial Planner professional at SoFi, what today’s job-switchers should do with their old 401(k) accounts.

“There is no right or wrong answer about what to do with an old 401(k),” Meade told us. “You can keep it where it is, roll it into your new 401(k) plan or even roll it into an IRA. To help make this decision, you’ll want to evaluate the fees you’re paying in your current plan, versus the fees you’ll pay in a new plan or an IRA. You’ll also want to evaluate the investment options available to you.”

Since we don’t know the fees or investment options associated with your 401(k), we won’t be able to give you a firm answer on what to do with your account after switching jobs. That’s why we asked Meade to help us narrow down the pros and cons of each potential option.

Whether you keep your plan with your former employer, move your plan to your current employer or roll your 401(k) into an IRA, here’s what you need to know — including how you can decide which option is best for you.

In this article:

Keep your plan with your former employer

In most cases, you should be able to keep your 401(k) plan right where it is — and in some cases, that could be the right decision. “You may like your current plan’s investment options,” Meade explained, “and the fees may be reasonable.”

Keeping your 401(k) plan with your current employer won’t require any extra work, which is another plus. On the other hand, Meade told us that some employer-sponsored retirement plans charge higher fees to former employees, which means that choosing to stay could cost you money.

If you switch jobs on a regular basis, you’ll also need to keep track of your old 401(k)s. Having multiple retirement accounts is always a little more complicated than having a single account, especially if you’re interested in rebalancing your investment portfolio as the market shifts or your risk tolerance changes.

“It’s harder to keep up with multiple accounts,” says Meade.

Move your plan to your current employer

If you get a new job that offers an employer-sponsored retirement plan, you may want to transfer your old 401(k) to the new plan. “Rolling the money into your current employer’s plan lets you keep everything in one place,” Meade explains.

While moving your plan to your current employer is an easy way to solve the problem of what to do with your 401(k) after switching jobs, you’ll still want to compare fees before making the move. “Your current employer’s plan may offer lower fees than your old plan,” says Meade, “but you still may end up paying higher fees than you would if you rolled your money into an IRA.”

You’ll also want to take a careful look at the investment options associated with your current employer’s sponsored retirement plan. If the funds available to employees come with high expense ratios, for example — or if the plan doesn’t allow you to select the kind of sustainable investments that match your values — you may want to roll your old 401(k) into an IRA.

Does that mean you shouldn’t invest in your current employer’s plan? Not necessarily. You can still participate in your current employer’s 401(k) plan, especially if it comes with a company match. But by putting your old 401(k) into in a lower-fee, higher-investment-option IRA, you might be able to get a little more out of your retirement savings.

Roll your 401(k) into an IRA

Rolling your old 401(k) into an IRA is an extremely popular choice, in part because it gives you the most freedom. “With an IRA, you can choose your own investments,” Meade explains. “You aren’t limited to the funds offered by your employer-sponsored retirement plan, and you may be able to choose investments with lower expense ratios and fees.”

Of course, you’ll have to decide whether to roll your 401(k) into a traditional IRA or a Roth IRA, and each choice comes with its own pros and cons. Both 401(k) plans and traditional IRAs allow you to put pretax dollars into your retirement account, giving you the opportunity to invest more money now and pay taxes later.

Roth IRAs, however, are funded with after-tax dollars. This means that you’ll need to pay taxes on the money in your old 401(k) — and even though the tax bill won’t come due until next April, some people may have trouble setting aside the necessary cash.

That said, a Roth IRA offers considerable benefits. Not only are you able to withdraw your contributions at any time, without penalty, as long as the account has been open for at least five years, but you may also be able to withdraw a portion of the account’s earnings — the growth on your investments, in other words — if you become a parent, become a homeowner or use the money to cover qualified educational expenses.

What you do with your old 401(k) after switching jobs is up to you. But by understanding the pros and cons of each of your options, you’ll be more likely to make an informed decision.

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About Nicole Dieker

Nicole Dieker has been a full-time freelance writer since 2012, with a focus on personal finance and habit formation. In addition to Haven Life, her work regularly appears at Lifehacker, Bankrate, CreditCards.com, and Vox. Dieker spent five years as a writer and editor for The Billfold, a personal finance blog where people had honest conversations about money, and is the author of Frugal and the Beast: And Other Financial Fairy Tales.

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Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our editorial policy

Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.

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