What Should I do with my Old 401(k) Plan?

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Did you leave an old employer? Did you start a 401(k) with that old employer? If you're wondering what should I do with my old 401(k) money, find out here!

In this article

Guys and gals,

I thought today would be a great day to talk about old 401(k) money – or generally any retirement plan money from an old job.

So I had a ZOOM conversation with one of my good friends and her husband the other day. 

We don’t live very close to each other, so I thought it would be nice to catch up on old times and see how they were doing.

When I logged onto the ZOOM call, the first thing I noticed was both of their big smiles. 

I mean, I knew we liked each other – but I didn’t think they would be that happy to see me.

So, I asked them what the smiles were all about.

Turns out, my friend’s husband had just received a letter from an old employer. 

The letter notified him that he has about $15,000 sitting in an old 401(k) plan from back when he was working at that employer’s place. 

Both my friend and her husband had forgotten about that money and were thrilled to find out about this “extra” saving they could add toward their net worth!

What a way to start a ZOOM conversation – saying that you “found” an extra $15,000. I know I sure could use an extra $15,000 any day. 

Then my friend’s husband started asking questions about the new money. 

First of all, his question was, what do you actually do with this old 401(k) money? 

Do they have to leave that 401(k) money at his old employer’s account forever? 

Can he take a cash withdrawal? 

Those are all understandable questions – especially seeing that you generally are not taught in school what to do with old 401(k) money.

After walking them through some of their options and clarifying what they actually can do with this “old” money, I figured this conversation would be blog post worthy so I can share my knowledge with my favorite guys and gals!

And here we are, writing a blog post.

Recommended reading: How does a 401(k) work? 

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What happens to my old 401(k) money?

Especially in your 20’s and 30’s you may go through several different employers and jobs before you find your dream job and continue working there for the rest of your life. 

If you have been reading my blog articles, then you would know that I am a proponent for investing and saving as much as possible. 

Let’s say you took my advice and saved in your old employer’s 401(k) plan. 

And then you had a new job opportunity come along your way and you decided to join forces with a new employer, leaving your old 401(k) plan behind. 

What actually happens to that money that was left behind, at your old employer’s 401(k) investment plan?

The big picture answer is that it depends on the employer’s 401(k) plan. 

Some employers keep your 401(k) money invested – in whatever investment accounts you had selected while you were still working there. 

Some employers liquidate your investments (which means they sell out of your investments) and just keep your money in cash in your old 401(k) account. 

Other employers could automatically close out your old 401(k) and send you a check equal to the amount of money you originally had in the 401(k). 

The employers will typically close out your 401(k) if you have a low account balance – but that depends on the employer. 

What you don’t want to happen is that your old employer decides to liquidate your investments and just keep your old 401(k) in cash. 

Why is this bad?

Let’s say you completely forget about this old 401(k) money. And let’s say 50 years later, you realize you have $15,000 sitting in your old 401(k) plan. In cash. For the last 50 years. 

I would say that inflation likely ate away at the purchasing power of your $15,000. 

That’s why you want to have that money invested in your 401(k) plan – to grow with the stock market and to outpace inflation. 

Unfortunately, that’s what happened to my friend’s husband: his old employer had liquidated his prior 401(k) investments and now it all was sitting in cash. For the last 5 years.

I was so relieved that they had told me about this because now I could help them get the money out of the old 401(k) plan and move it to a place where they could start investing and growing their money.

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What should I do with my old 401(k) money?

So let’s say you realized you have 401(k) money sitting in an old employer’s retirement plan. 

Or even better: let’s say that you are just about leaving your employer to work somewhere else – and you have some money stashed away in the soon-to-be old employer’s 401(k) plan. 

What do you do?

I know when I first started in my company 401(k) plan, not knowing anything about finance, I was afraid I would lose any money I invest in my 401(k) plan. 

I thought that if I left my employer, they would take my 401(k) savings. 

That’s a fallacy – that is a mistaken belief.

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How to move your old 401(k) money 

Read the steps below to figure out how to most efficiently move your old 401(k) money to a new plan so that you can consolidate (meaning getting a better overview of your accounts) and actually invest your money in better funds. 

Step # 1: What type of a 401(k) is it?

Before you do anything else, you want to make sure you review the actual titling of this 401(k) plan. 

In other words, is it a traditional 401(k) or is it a Roth 401(k)?

As a reminder: a traditional 401(k) is pre-tax money. A Roth 401(k) is after-tax money.

Make sure you look for that difference. 

Most companies offer only the traditional 401(k) plan. This is the most common company retirement plan. 

However, in recent years, I have seen a spike in the number of companies offering Roth 401(k) retirement plans. 

If you can’t find the type of plan you have, then pick up the phone and call your Human Resources department

You need to know this information before we proceed.

Keep in mind that we need to move your 401(k) money from a like account to a like account. 

That means if you have a traditional 401(k), we will need to move that money to a traditional IRA. 

If you have a Roth 401(k) plan, we will need to move that money to a Roth IRA. 

Step # 2: Do you have an existing Traditional IRA or Roth IRA?

Now that we have identified the type of 401(k) plan you have – either traditional or Roth – it’s time to identify if you have an existing IRA (or IRAs). 

If you do not have an existing IRA – skip to step #3.

If you do have an existing IRA, keep reading. 

Just like in Step 1, make sure you read the titling of this IRA. 

It is very important to know whether your existing IRA is a traditional IRA or a Roth IRA.

The difference – just as with the 401(k) plans, is the tax picture. 

A traditional IRA is funded with pre-tax money (99% of the time) and a Roth IRA is funded with after-tax money.

Recommended reading: Roth IRA vs. Traditional IRA: Beginner’s guide

Step # 3: If you do not have an existing IRA, now it’s time to open an account

Let’s say you have identified that your old 401(k) plan was a traditional plan. 

Let’s also say you realized you do not have an IRA account. That’s OK. 

But – before you do anything else, you now need to open a traditional IRA account. 

Yes, you will have to open an IRA account before you can do anything with your 401(k) money.

You can open an IRA account without funding it – that’s no problem. 

The point is, you need an IRA account number in order to make the transfer with your old 401(k) money. 

Remember, you need to move your 401(k) money from a like account to a like account. 

That means if you have a traditional 401(k), we will need to move that money to a traditional IRA. 

If you have a Roth 401(k) plan, we will need to move that money to a Roth IRA. 

Step # 4: Call your 401(k) plan provider

Now that you are prepared and ready to move your old 401(k) money over to your IRA accounts, it’s time to call your old 401(k) provider.

If your old employer is like most companies, you would be receiving 401(k) statements every quarter. 

You would either receive these statements in the mail or likely now paperless. 

The point is, you’ll notice a customer service phone number on your statements.

If you don’t see a customer service number or can’t find those statements, then pick up the phone and call your Human Resources department. 

They will 99% of the time have that 401(k) plan provider phone number handy and ready to give to you.

You need to call that 401(k) plan provider number and talk to a customer service representative.

Step #5: Ask your customer service representative about a 401(k) roll over

The keyword that you will be asking about is “how to roll over your old 401(k) plan.”

Your customer service representative will likely send you over some paperwork via email or via mail to complete and then send back to your 401(k) plan provider. 

Keep in mind that your 401(k) plan provider is probably not the same as your old employer. 

Make sure to let this customer service representative know that you are looking to make a “direct rollover” to your new IRA plan.

Pro Tip: You want to make a direct 401(k) rollover

That means you do not take receipt of the “check” that would be sent to you, based on how much you contributed in your old 401(k) plan. 

You don’t want to deposit that 401(k) money in your bank or savings account because that could have tax penalties and another 10% penalty on top of taxes if you take receipt of that 401(k) money if you are younger than 59.5 years.

So unless you seriously need the money, make sure you ask directions for a direct rollover. 

Your 401(k) money will be directly sent to your IRA account (which also has restrictions on when you can take out that money – 59.5 years is the youngest you can take the money out without possibly incurring taxes and penalties). 

Step #6: Complete the 401(k) rollover documents 

This is self-explanatory. 

Make sure you complete the documents accurately and precisely. 

This is the point where your traditional IRA or Roth IRA account number will come in handy. 

You’ll be marking to which account you want your 401(k) money to go.

Read through the 401(k) direct rollover documents. 

Take your time. 

Sometimes you may miss the fine print, incorrectly mark an item on the paper and that will cause you to restart the entire process.

Do it right the first time.

Step #7: Take time – be patient

It might take a while for your direct rollover to be processed. 

Your customer service representative should tell you this information. 

If you don’t see the money transfer within that time frame, pick up the phone again and make sure your documents are in good order.

Sometimes companies do not process a 401(k) rollover request if the documents are not in good order. 

Sadly, you likely won’t be notified by the 401(k) plan provider that your documents are not in good order. 

So you might be waiting for weeks only to find out that your request was denied.

Be proactive. 

Step #8: Invest your 401(k) rollover money once received in the IRA

Once you see your 401(k) money in your IRA, it’s time to invest properly.

Remember, the likelihood is your old 401(k) plan provider would have liquidated (meaning sold all investments) your 401(k) account to cash and then transferred that money to your IRA account. 

So chances are, you’ll see a nice chunk of cash (so no invested money) in your IRA.

The worst thing you can do is keep that 401(k) money in cash. 

You want to invest that money. 

Remember, you have more (and likely better) investment options in your IRA plan than in a 401(k) plan. 

That’s because you are restricted as to what you can invest in your 401(k) plan. 

While in an IRA, you can invest in anything you want. 

You’ll have to invest that money based on your investment strategy. I can sadly not give you advice on that. 

But what I can say is this: invest that money and let it grow.

Closing Thoughts

If you have money in an old 401(k) plan at an old employer’s place, it’s time to start moving that money.

The worst thing that can happen is if that old employer liquidated your investments at your old 401(k) plan and that money has just been sitting in cash. 

It has happened before – it happened to my friend’s husband and that cash has been sitting in his old 401(k) plan for 5 plus years. 

Inflation will eat away at that cash.

Once you realize you have an old 401(k) plan, it’s time to do a direct rollover to a traditional or Roth IRA plan. 

The point is: you have to roll your old 401(k) plan to a like account. 

That means if you have a traditional 401(k) plan, you’ll have to roll that money to a traditional IRA. 

The same goes for a Roth 401(k) plan and a Roth IRA. 

Once that old 401(k) money has been rolled into your IRA, it’s time to invest. 

Don’t let that money sit as cash. Make your money work for you.

Your bank accounts will thank me later!

Recommended reading: How to invest in your 401(k)

Have you had to roll an old 401(k) into an IRA? Share your experience below!

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Fiona Smith
Fiona Smith
The Millennial Money Woman was founded by Fiona Smith. She holds her Master of Science Degree in Personal Financial Planning and has co-founded a local non-profit community teaching financial literacy to young professionals.

2 thoughts on “What Should I do with my Old 401(k) Plan?”

  1. Hi MMW – good post, I bet a lot of people have forgotten about money in old 401ks. I have consolidated all of my old 401ks as I like having them in my traditional and Roth IRAs. I also like having the freedom to invest in funds of my choice, rather than the limited choices in old 401ks, those fees are too high!

    1. Thank you so much for your kind words! I have seen this happen many times: people forget about old 401k money – and about 10 or 20 years after leaving their old job, they remember about the money they saved back then. However, in many cases, I’ve seen their holdings be liquidated (perhaps their old company moved to another 401k plan provider, so they had to sell the holdings) and consequently had their money sit in cash for the past 10+ years… I completely agree – 401k fees are generally pretty high and sadly you are restricted in which funds you can invest – and often times they are not always the best fund choices.

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