“With the average person changing jobs every 4 years, over $3.1 trillion dollars have been left behind in 401(k)’s at old jobs collecting huge fees.”
Think about that, $3.1 trillion dollars have been left behind all because people don’t know what to do with their old retirement accounts when they leave their job.
But here’s the good news…. it's not gone forever.
You can go locate these & move them to a better place.
Let me educate you on how to do this and what your best options are with your old 401(k)’s:
I find this to be the best option more times than not since moving it to a new 401(k) helps you stay organized and allows you to still do backdoor Roth IRA contributions (so you can avoid the pro rate rule).
The only time you really do not want to do this is if your new 401(k) is really expensive and or lacks quality investment options. Other than that, I do not see many reasons to not send it here. It also offers you some added protections that come with employer sponsored retirement plans.
An IRA is an individual retirement account. It is very similar to a 401(k) as it is a pre-tax account, the main difference is that is an individual retirement account vs an employer sponsored one.
This is a pretty simple process and can work well, but the reason I do not like it is because it stops you from being able to do backdoor ROTH IRA contributions in the future and here’s why:
To do a backdoor ROTH you put money into an IRA, you do not deduct the contributions, then you convert it to ROTH. However, if you have an old 401(K) that sits in an IRA, or any other pre-tax IRA money out there (in Sep IRA’s, Simple IRA’s, SEP IRA’) then part of this backdoor ROTH becomes taxable.
Let’s say you want to do the full $7,000 for 2025 to your backdoor ROTH but you have $7,000 in a pre-tax IRA. This means if you did the backdoor ROTH you would end up having half being taxable.
Why?
The pro-rate rule. It looks at all your IRA balances and then calculates what it taxable by the percentage of pre-tax vs non deductible. In this example 50% was pre-tax and 50% was non deductible, so 50% becomes taxable.
This is why I like to move old 401(K)’s or IRA’s into new 401(K)’s but this is still a viable option and can be a good one for people who will not be over the Roth IRA income limit.
This is very similar to #2, it just adds one more step. This means you pay tax to convert this pretax money to post tax. Then the money gets to grow tax free forever.
This could be a really good move in really low income years. It also can be smart to do if it is just a small balance and you want to be able to continue doing backdoor Roth IRA contributions. But know you should pay the tax out of cash to avoid a 10% penalty.
Sometimes the best move is just to keep it where it is.
I don’t like this often as it gets easy to forget about them down the road, but sometimes it is the best option you have. If it is invested well and your new 401(k) has poor investment options, expensive investment options, etc. then this could be a okay route.
To be honest, I did not even want to include this one.
But… the truth is, it is an option so I had to list it. Know that if you do this then you need to pay income taxes and a 10% penalty which puts you pretty far behind. I would try and avoid this at all costs.
So now you know what your options are, but what do you do about those old retirement accounts you can’t find?
There’s a few cool services out there that will help you go and find your old accounts.
My favorite options are Beagle, National Registry of Unclaimed Retirement Benefits, Free Erisa, etc.
Do not let these funds get forgotten about.
I highly recommend you keep these organized and consolidate as you move jobs.
That's the best and easiest time to do it.
Financial Advisor