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If you have a 401(k) or 403(b) at a former employer, you’re likely not sure what to do with it. That’s what we found out in a survey of those who made a job transition—almost a third were unsure of what to do with their workplace saving plan. 1

“It can be an emotional time when you are retiring or changing jobs,” says John Sweeney, executive vice president of retirement and investing strategies. “But be careful not to make hasty decisions with your workplace savings plan. In particular, beware of cashing out, which often comes with high taxes and penalties and can undermine your ability to reach your long-term goals.”

Weigh your options

Because your 401(k) assets are often a significant portion of your retirement savings, it’s important to weigh the pros and cons of your options and find the one that makes sense for you. You generally have four choices:

• Leave assets in a previous employer’s plan
• Move the assets into a rollover IRA or a Roth IRA
• Roll over the assets to a new employer’s workplace savings plan, if allowed
• Cash out or withdraw the funds

Here are some things to consider about each.

Option: Keep your 401(k) with your former employer

Check your previous employer’s rules for retirement plan assets for former employees. Most companies, but not all, allow you to keep your retirement savings in their plans after you leave. If you have recently been through a drastic change such as a layoff, this may make sense for you. It leaves your money positioned for potential tax-deferred investment growth so you can take time to explore your options.

The benefits of leaving your assets in the old plan may include:

• Penalty-free withdrawals if you leave your job in or after the year you reached age 55 and expect to start taking withdrawals before turning 59½
• Institutionally priced (i.e. lower-cost) or unique investment options in your old plan that you may not be able to roll into or hold in an IRA
• Money-management services that you’d like to maintain; note that these services are often limited to the investment options available in the plan
• Broader creditor protection under federal law than with an IRA

Some things to consider:

• Typically, employers allow you to keep assets in the plan if the balance is over $5,000. If you have $5,000 or less, you may need to proactively make a choice to remain. If you don’t, some plans may automatically distribute the proceeds to you (or to an IRA established for you).
• You’ll no longer be able to make plan contributions or, in most cases, take a plan loan.
• You may have fewer investment options than in an IRA.
• Withdrawal options may be limited. For instance, you may not be able to take a partial withdrawal, but instead may have to take the entire amount.

Option: Roll the assets into an IRA

Rolling your 401(k) assets into an IRA still gives your money the potential to grow tax deferred, as it did in your 401(k). In addition, an IRA often gives you access to a wider variety of investment options, such as annuities, 2 than are typically available in an employer’s plan.

If you have other accounts at a financial institution that offers IRAs, you often get combined statements. This gives you a more complete view of your financial picture, which may make it easier to plan and effectively manage your savings. It’s also easier to maintain your target asset mix if your investments are in one place. Make sure to research IRA fees and expenses when selecting a IRA provider, though. These fees vary greatly from firm to firm.

Another consideration is what type of investor you are. If you like to do it yourself, a wide choice of investment options may be important. If you want a sophisticated yet simple-to-choose investment option based on your expected retirement date, a target date fund can be a very good choice. If you want a more personalized solution, a managed account service may be the way to go.

Of course, you need to weigh the costs and benefits of each approach. Managing a portfolio of ETFs yourself will entail far fewer investment expenses than buying a professionally managed lifecycle fund or managed account. However, if you do not have the time, investing skill, or interest in managing your own portfolio, you may be better off with a professionally managed account.

Any of these approaches may be achieved with a rollover IRA.

Other benefits of rolling over to an IRA may include:

• The option of converting assets to a Roth IRA. which is a taxable event but which provides federal tax-free withdrawals of future earnings, providing certain conditions are met. 3  Note: Your previous or new employer plan may offer a Roth workplace savings plan and allow participants to convert non-Roth assets into an in-plan Roth account.
• Penalty-free withdrawals for qualifying first-time home purchase or qualified education expenses if you’re under age 59½ 4
• Investment guidance and money management services through a professionally managed account.

But take into consideration that:

• After you reach age 70½, you’re required to take minimum required distributions from an IRA (except for a Roth IRA) every year, even if you are still working. If you plan to work after age 70½, rolling over into a new employer’s workplace plan, or staying in the old one, may allow you to defer taking distributions. 5
• If you need protection from creditors outside bankruptcy, federal law offers more protection for assets in workplace retirement plans than in IRAs. However, some states do offer certain creditor protection for IRAs too. If this is an important consideration for you, you’ll want to consult your attorney before making a decision.

A special case: company stock

If you hold appreciated company stock in your workplace savings account, consider the potential impact of net unrealized appreciation (NUA) before choosing between a rollover or an alternative. Special tax treatment may apply to appreciated company stock if you move the stock from your workplace savings account into a regular (taxable) brokerage account rather than rolling the stock (or proceeds) into an IRA. You may want to consider asking your financial adviser or tax accountant for help on how NUA may apply in your situation.

Option: Consolidate your old 401(k) assets into a new employer’s plan

Not all employers will accept a rollover from a previous employer’s plan, so you need to check with your new plan administrator. If your new employer accepts your rollover, the benefits may include:

• Continuing to position your assets for tax-deferred growth potential
• Combining plan accounts into one, for easier tracking and management
• Deferring minimum required distributions if you are still working after you turn age 70½ 5
• Availability of plan loans (be sure to confirm that the plan allows loans)
• Investing in lower-cost or plan-specific investment options, if available
• Broader creditor protection under federal law than with an IRA

But consider this:

• Your 401(k) may have a limited number of investment options compared to an IRA.
• You will be subject to the new employer’s plan rules, which may have certain transaction limits.

Option: Cash out

Taking the assets out should be a last resort. The consequences vary depending on your age and tax situation, because if you tap your 401(k) account before age 59½, it will generally be subject to both ordinary income taxes and a 10% early withdrawal penalty. In fact, in a Fidelity survey, more than half (55%) of those surveyed who cashed out of a 401(k) said they would not make the same decision again. An early withdrawal penalty doesn’t apply if you stopped working for your former employer in or after the year you reached age 55 but are not yet age 59½. This exception doesn’t apply to assets rolled over to an IRA.

If you are under age 55 and absolutely must access the money, you may want to consider withdrawing only what you need until you can find other sources of cash.

Cashing out early can cost you