By Judith Ward on March 26, 2012

With today's market conditions, it's understandable that many investors are undecided as to what to do with the savings in their old 401(k). Whether you've changed jobs, are retiring, or are simply reevaluating your retirement savings portfolio, the options outlined below can help clarify your choices.

While there are several options, the right one for you depends in large part on your personal circumstances and long-term financial goals. For example:

  • If you plan to retire early, employer-sponsored plans typically allow employees who leave the workforce at age 55 or older to make penalty-free withdrawals (income taxes still apply).
  • If you'd like more flexibility and greater control over your withdrawal and investment options, a rollover into a Traditional or Roth IRA may be a better choice.

As you compare the following options, keep in mind that tax-deferred growth potential may be the greatest benefit for your retirement assets. Preserving that tax advantage can substantially improve your ability to build wealth over time.

Option 1: Roll over the assets into an IRA


  • Maintains the tax-advantaged status of your investments.
  • Allows you to consolidate retirement plan assets.
  • Usually offers access to a wider range of investment options (as compared with keeping the assets in an employer-sponsored plan), making it easier to create an appropriate investment portfolio.
  • Gives you the option of taking penalty-free withdrawals before age 59½ under certain circumstances.
  • Allows you access to your money at any time—though distributions may be subject to penalties and taxation.


  • Does not offer loan provisions.
Traditional vs. Roth

The major difference between the accounts has to do with taxes. When you roll assets into a Traditional IRA, you can defer taxes until you make withdrawals (mandatory at age 70½), which are generally subject to income taxes. With a Roth IRA, you pay current income tax on pretax amounts and any earnings you move from a workplace plan. However, withdrawals are tax-free (if certain conditions are met) and are not required. Many investors may choose to roll over to a Traditional IRA then convert those assets, over time, to a Roth IRA.

Next Steps

  • Open a Traditional or Roth Rollover IRA, and move the assets directly from your previous employer's plan to your new IRA.
  • Check to make sure your asset allocation is properly aligned with your goals and time horizon.
Option 2: Move the assets into your new employer's plan


  • Maintains the tax-advantaged status of your investments.
  • May permit loans.*
  • Generally allows for penalty-free withdrawals if you separate from service after you reach age 55 or older (although your distributions are still subject to income taxes).


  • Investment options are limited to those in the new plan.
  • There is limited access to withdrawals.**

Rolling over assets into your new plan should be relatively simple. Contact your new plan sponsor, who can guide you through the process.*

Next Steps

  • Determine if the new plan accepts rollovers.
  • Familiarize yourself with the new plan options and rules for moving money.
  • Decide whether the new plan meets your needs.
  • Roll over assets from your previous employer's plan if you feel it is appropriate.
Option 3: Leave the assets in your former employer's plan


  • Offers familiar investment options.
  • Maintains the tax-deferred status of your investments.
  • Generally allows for penalty-free withdrawals if you separate from service after you reach age 55 or older (although your distribution is still subject to income taxes).


  • May have a minimum balance requirement to remain in plan; some plans will only continue to maintain accounts of $5,000 or more.*
  • There is a limited access to withdrawals.**

If you choose this option, remember that having several accounts spread among previous and current employers may make it challenging to keep your asset allocation on track.

Next Steps

  • Review the plan restrictions for former employees.
  • Determine if the plan's investment options are a good fit for your portfolio.
Option 4: Cashing out the account entirely

While this may provide immediate access to your retirement plan assets, the effect on your retirement savings could be significant.


  • Removes the potential for continued tax-deferred or tax-free growth of your assets.
  • Subject to mandatory 20% withholding on the distribution. You may be liable for more when you file your taxes if your income tax rate is higher than 20%.
  • May be subject to a 10% early withdrawal penalty if you are under age 59½ (some exceptions apply).

Although cashing out of your plan may seem tempting if you have significant debt, it's wise to consider the downside. As an alternative, you may want to review your finances for other ways to generate the money you need to pay down your liabilities. Having cash in hand may be hard to resist, but the costs associated with cashing out can be substantial, and those savings will be lost.

Whether you leave your assets in your current plan or roll them over to your new plan or an IRA, it's important to allow them to grow until retirement. Continuing to contribute to your plan and IRA will give you the best chance to build wealth and support your lifestyle in retirement.

*Depends on employer plan provisions.
**Plans may allow withdrawals for financial hardships or severe disability.

T. Rowe Price (including T. Rowe Price Group, Inc., and its affiliates) and its associates do not provide legal or tax advice. Any tax-related discussion contained in this article is not intended or written to be used, and cannot be used, for the purpose of (i.) avoiding any tax penalties or (ii.) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this article.