You’ve Accumulated Multiple 401(k)s in Your Tech Career. Here’s What to Do with Them.
(5 minutes to read)
At some point in your tech career, you may look back and realize you have 401(k) accounts sitting at three, four, or even five former employers. It happens gradually, with each job change bringing a new plan. And while you’re focused on your current job, the old 401(k)s tend to get left behind.
This isn’t just a hypothetical. It’s one of the most common financial situations I encounter with tech professionals. Fortunately, the answer to what you should do with those accounts may be more straightforward once you evaluate your options. What stops most people is simply not taking the time to work through the decision.
You have four options for an old 401(k), and each has trade-offs. Here’s how to think through them.
Option 1: Leave It Where It Is
Many former employers will allow you to keep your 401(k) in their plan after you leave, provided your balance exceeds $7,000. Below that threshold, the plan may cash you out or automatically roll the balance into an IRA on your behalf.
Technically, leaving the 401(k) alone is the path of least resistance. In practice, it may be less effective in some cases, depending on factors like fees, investment options, and account oversight.
The problems with leaving old accounts scattered across former employers accumulate over time. First, there’s the practical issue: People forget about them. Every few years, I come across a tech professional who, mid-planning conversation, suddenly remembers a 401(k) from a company that was acquired years ago. Tracking down those accounts years later can be difficult.
Second, old employer plans may carry higher administrative fees than what’s available to you through an IRA or a well-structured new employer plan. The investment menu may also be more limited, leaving you with fewer low-cost index fund options.
That said, leaving an account in place can make sense in specific situations. Former employer plans often carry strong protections against creditors under ERISA, a federal law that shields retirement assets from most civil judgments and bankruptcies, whereas IRA creditor protection varies by state and is generally weaker. The investment lineup is worth checking, too. If your former employer’s plan has access to institutional-class funds with very low expense ratios, it may be better than what you’d get elsewhere.
Option 2: Roll It into Your New Employer’s 401(k)
If your current employer accepts incoming rollovers, you can consolidate your old 401(k) balances into your new plan. This is a straightforward option that keeps everything inside the 401(k) structure.
The main reasons to consider this route over an IRA rollover are creditor protection, as 401(k) plans generally offer stronger federal protections than IRAs; the Rule of 55, which allows penalty-free withdrawals from a current employer’s plan if you separate from that employer at age 55 or older (a provision IRAs don’t offer); and the ability to take plan loans if that’s something you anticipate needing.
The important caveat: The new employer’s plan has to be worth rolling over your assets. If the investment options are poor or the fees are high, you may be trading a mediocre old plan for a mediocre new one. Review the plan’s fund lineup and expense ratios before making this decision.
Option 3: Roll It into an IRA
For many tech professionals, rolling old 401(k) accounts into an IRA may be worth evaluating. An IRA gives you the broadest possible investment menu, a single consolidated account you can manage as part of a coherent strategy, and access to low-cost index funds from Vanguard, Fidelity, Schwab, or similar providers.
The mechanics are straightforward. You open a traditional IRA, or Roth IRA if you’re rolling from a Roth 401(k), and initiate a direct rollover from the old plan. A direct rollover, where the funds go directly from the old plan to the IRA without passing through your hands, is the right way to do this. If you instead take a distribution and then deposit it yourself within 60 days, there’s a mandatory 20% withholding, and the process creates more room for errors.
One thing to get clear: You have to match the tax character of the funds. Traditional 401(k) money rolls into a traditional IRA. Roth 401(k) money rolls into a Roth IRA. You cannot roll traditional 401(k) funds into a Roth IRA without recognizing the taxable income in the year of conversion. That’s a Roth conversion, which is a separate strategy with its own considerations.
One planning note for those with after-tax (non-Roth) contributions inside an old 401(k): A pro-rata rollover strategy may allow you to roll the after-tax basis into a Roth IRA tax-free while rolling the pre-tax portion into a traditional IRA. This is often called the “mega backdoor Roth conversion” at distribution. It can be a great opportunity, but it requires careful execution.
Option 4: Cash It Out
This option deserves a section because it’s the one people sometimes do, even though it’s often the worst choice financially.
If you cash out a 401(k) before age 59½, you owe ordinary income tax on the entire amount plus a 10% early withdrawal penalty. For a tech professional in the 32% or 37% federal bracket, that’s a combined federal hit of 42% to 47% before state taxes. A $50,000 old 401(k) can easily become just $25,000 in your pocket after taxes and penalties. You also permanently forfeit the tax-deferred (or tax-free) compounding on those dollars.
There are limited exceptions to the 10% penalty, such as certain medical expenses and disability, but none of them apply to the typical situation of “I need cash, and I have this old 401(k).”
Cash out only as a genuine last resort, and not before exploring every other option.
The Case for Consolidation
If you have five or six old 401(k)s sitting with former employers, the most practical question isn’t which option is theoretically best in a vacuum. It’s which approach gives you the clearest, most manageable financial picture going forward.
Consolidating old accounts into a single IRA (or into your current employer’s plan, if that makes sense) can have benefits. You have one account to monitor, one investment allocation to manage, and a cleaner picture of your total retirement savings. Plus, when you get to the required minimum distribution age (73 under current law), calculating and managing RMDs across one or two accounts can be much simpler than doing it across six.
Consolidation can also make it easier to implement a coherent investment strategy. Many tech professionals have old 401(k)s that drifted into whatever default target-date fund the plan assigned. Pulling those accounts together lets you build an allocation that can reflect your risk tolerance, time horizon, and overall financial picture.
One thing to watch for: If you have company stock inside an old 401(k), check whether net unrealized appreciation (NUA) treatment applies before you roll it over. NUA is a provision that allows you, under certain conditions, to take a lump-sum distribution of company stock and pay long-term capital gains rates on the appreciation rather than ordinary income rates. It’s not applicable in every situation, but it can be significant if you have a large, highly appreciated stock position inside an old employer plan.
Do It Now
The reason many tech professionals have a collection of forgotten 401(k)s isn’t that the decision is hard. It’s that it never feels urgent. There’s no deadline, no penalty for waiting, and no immediate pain from inaction. The money just sits there.
The cost of inaction is real, though. That cost can include suboptimal investment options and higher fees quietly compounding over the years. Accounts can get harder to track and consolidate the longer you wait. And the fragmented financial picture can make other planning decisions harder to execute.
For many people in tech, consolidating accounts through an IRA may be one option to consider as part of an overall investment strategy. It’s a decision that may be more straightforward once you sit down and evaluate the relevant factors.
If you have old 401(k)s sitting unattended at former employers, or you’re not sure which rollover option makes sense for your situation, I work with technology professionals on questions like this every day. You can schedule a complimentary consultation directly.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.
Bruce R. Barton
Managing Partner / Financial Advisor
CFP®, CFA®, MBA