Q&A: What to Do With a Former Employer’s 401k or 403b

Question: “Hi Justin, I just changed jobs and I was thinking back to the conversation we had a while ago about Traditional 401k and Traditional 403b accounts. You explained the options I’d have when I switched employers, but I’m not sure I remember them accurately. Could you remind me?”

Answer: Happy to help! When you leave an employer you will typically have four options to choose from regarding what to do with your old account. You won’t always have all four options, and some of the options are likely not a good fit depending on your individual circumstances, but here is a quick breakdown:

1) Cash out the account – This is technically an option, but in the vast majority of situations it’s a bad option. You’ll likely be assessed a 10% penalty (on top of normal income taxes) because you are under age 59.5 and don’t meet the conditions for an exemption to the 10% penalty.

2) Leave it where it is – Many employers don’t make you do anything with a 401k/403b when your employment ends, so you might have the option to just leave it where it is. This is an easy option, but it doesn’t mean it’s the best option. If you choose to leave it where it is, make sure you don’t forget about the account years later.

3) Roll it into your new 401k/403b – The IRS allows you to roll your old account into your new employer’s account. However, your new employer is not required to allow this. If your new employer’s 401k/403b has good investment options, low costs, and allows incoming rollovers, this is an option to consider.

4) Roll it over to an IRA – Rolling your old employer account into an IRA is the final option. Depending on your individual situation, this may or may not make sense. This would also be a route to take if you wished to convert some or all of the funds into a Roth IRA. For some people the taxation rules of a Roth IRA may be more advantageous than the taxation rules of a Traditional IRA.

I hope this helps! You should investigate each option completely before making a decision. Please let me know if you have any additional questions about the choices above.