According to the Bureau of Labor Statistics, the average worker will hold an average of eleven to twelve different jobs by the time they turn forty. Depending on how many of those jobs offered retirement benefits, that could add up to a handful of old 401ks lacking a home. If you’re not sure what to do with an old 401k during your next job transition, consider the following alternatives:
Leave It There
In some circumstances, it may be possible to leave your old 401k where it is. Depending on the rules of the old plan, you may be able to keep your 401k invested in the old plan which has a couple advantages, one being that it is the option requiring the least amount of effort, and the other being that some funds available in your old employer's plan may not be available elsewhere.
Move It To Your New Employer
Depending on your new employer’s plan, you may be able to move your old 401k into the new plan. The benefit of moving an old 401k to your new plan is having the option to invest in plan-specific funds.
While this option may seem easy, it can be incredibly costly due to the penalties that come from distributing a retirement account early. Consider a 401k plan worth $100,000 that you decide to distribute when changing jobs. That money will be taxed at your federal rate, the state rate, and the penalty rate. That means that assuming a 25% federal rate, and 8% state rate, and a 10% penalty rate, you will only receive $57,000 when that money could continue growing tax-deferred. This is clearly the worst option.
Transition It To An IRA
When it comes to saving for retirement, consolidating your old 401ks into a traditional IRA is usually your best option. Doing so allows your savings to continue to grow tax-deferred, but also opens up your savings to a much larger universe of investment opportunities than the limited options available through 401k plans.
Bureau of Labor Statistics U.S. Department of Labor. (2015). Number of Jobs Held, Labor Market Activity, and Earnings Growth Among the Youngest Baby Boomers: Results From a Longitudinal Survey [Press release]. Retrieved from http://www.bls.gov/news.release/pdf/nlsoy.pdf.
*portions of this article were first published in May 2015