Switching Jobs

February 12, 2020

Do you know what to do with your old 401(k) accounts after you switch jobs? Depending on your situation I recommend that you do not cash it out and here’s why.

You’re basically giving up the potential for future tax deferred earnings and compound interest.

A Windfall?

Source: Fidelity.com

Leslie is left with only 70% of what she originally had, and the potential loss of future gains.

My kids watch a show called “Teen Titans Go”. (You should really know by now that all my references and analogies are from TV shows.) One of their episodes talks about how they eat a bunch of junk food, and waste money on things like matching jackets. Raven (one of the characters) keeps saying they should do better, you know, for the future. None of the others are willing to listen to her because who cares about the future—they care about the now. Well, what happens is that their future selves are all old and poor and unhealthy and blame it on poor decisions made in their youth. They decide to go back in time and teach their younger selves to save money, eat better, exercise, etc. Then the older versions get super fit and strong and have money to take care of themselves. Yay!

Here are the options you have once you leave a job and have an old retirement account to deal with:

  1. Leave it there.
    a. Pros: This is literally the easiest option. Costs may be low.
    b. Cons: Your old employer might start charging you fees or even require you to move your account if it’s under a certain balance.
  2. Roll it over to your new 401k.
    a. Pros: This consolidates your money and you can take advantage of the larger amount to compound on.
    b. Cons: You are limited to the investment options that your plan allows.
  3. Roll it to an Individual Retirement Account (IRA).
    a. Pros: You have many more options for investment choices, depending on where you open the IRA. Also, you may get to work with a financial advisor and factor investment choices against your overall goals.
    b. Cons: Be sure you know the costs/fees involved.
  4. Cash out of the account.
    a. Pros: It is your money at the end of the day.
    b. Cons: A taxable event, loss of investing potential. Costly for young individuals under 59 ½; there is a penalty of 10% in addition to income taxes.

The chart below shows you an example of future earnings. Investor 1, whom I will call Jill, invests a total of $50,000, and ends up with more money than Investor 2, who invests $150,000 total. All because of taking advantage of the time for compounding.

Compound Interest

This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed, and investment yields will fluctuate with market conditions.


Any opinions are those of Jill Carr and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10% federal tax penalty. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets.

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