Changing Jobs? What to Do With Your Old 401(k)

Today, job hopping is the norm. The average American stays at a job for 4.6 years—only three years for workers ages 25 to 34—according to the U.S. Bureau of Labor Statistics.¹ Over a 30-year period, Baby Boomers born between 1957 and 1964 held an average of 12 jobs² and Millennials are expected to follow a similar path.

While job hopping can open up advancement opportunities that may not have been possible at one company, it does have a downside that's not often talked about: Workers are accumulating 401(k) accounts at a rapid pace. Leaving an old account with a former employer is an option (and sometimes a good option), but it can cost you in additional fees and headaches if you aren't careful. With that in mind, here are four things you can do with your old 401(k):

• Cash out. It may be tempting to grab the money and go, but that's usually a bad move. If you cash out your 401(k), any taxable portion of your distribution is subject to a mandatory withholding of 20% for federal taxes. Unless you move your money into a qualified retirement plan within 60 days, it will be taxed as ordinary income. State income tax may apply, too. If you're under age 59½, you may also be subject to a 10% early withdrawal penalty. It's not just taxes: You'll also miss out on the potential growth that comes from keeping the money invested long term.
• Leave your money in your former employer's plan. If you like your current plan and your provider allows it, you can leave your money to benefit from potential tax-deferred growth. If your former employer changes plan providers in the future, however, your plan's costs (that is, administrative and management fees) may change. In some cases, your investments may be rolled over into cash or a cash equivalent until you select a new asset allocation, and because the return potential of a cash equivalent is generally much lower than a diversified portfolio, you could lose out on potential returns. Holding multiple retirement accounts can also be a headache when you reach age 70½ and must begin taking annual minimum distributions from each account; make a mistake, and you may have to pay a 50% tax penalty on the amount not withdrawn.
• Roll your money into a new 401(k). Some plan providers allow you to consolidate your existing retirement savings into your new plan. This may be a good option assuming you like the new plan's features, costs and investment options. Any earnings will continue to accrue tax-deferred and consolidating accounts can minimize management fees.
• Roll over assets into an IRA. Rolling your 401(k) into a traditional or Roth IRA may give you more flexibility in managing your savings, while allowing your earnings to grow tax-deferred or tax-free. Because IRAs are not employee-sponsored, you can maintain control of your account even if you change jobs again. An IRA provider may offer low-cost products, such as exchange-traded funds (ETFs), or additional services, including investing tools and guidance, that aren't available with your employer-sponsored plan.

Unlike 401(k)s, loans are not available from IRAs, you generally have fewer creditor protections, and you may not have access to certain investment options (such as stable value funds) or lower priced share classes.

Finally, if you decide to open an IRA, be sure to specify how it should be invested. Until you provide instructions, your money may remain in cash (or a cash equivalent).

If you're changing jobs, there are several things you can do with your old 401(k). Be sure to compare the pros and cons of all your available options, including fees and expenses, investment and distribution options, legal and creditor protections, loan provisions (if any) and tax treatment.