Got Old Retirement Accounts? 5 Costly Mistakes to Avoid

Having retirement accounts with previous employers can leave you unsure about what to do with them. Laura reviews your options five costly mistakes to avoid when dealing with your old retirement plans.

Laura Adams, MBA
8-minute read
Episode #565

3. Missing the benefits of consolidation.

As I previously mentioned, if you have multiple jobs during your career, you could end up with a bunch of different retirement plans. Not consolidating them is usually a mistake.

Having all your funds with a single financial institution means you’ll have a larger account balance, which may qualify you for lower fees or other perks. Plus, having all your retirement savings in one place makes it easier to track. Just make sure that the new plan has a wide selection of investment choices with low fees.

If you have a new job with a retirement plan, you may be able to roll over your old plan into the new one, once you’re eligible to participate. But in some cases, incoming 401(k) or 403(b) rollovers aren’t allowed, so be sure to check the plan’s rules or ask your new benefits administrator.

Another important consideration is the legal protection that your money has while it’s in a 401(k). The Employee Retirement Income Security Act of 1974 (ERISA) doesn’t allow creditors, except the federal government, to touch funds in a qualified workplace plan. In other words, if you get into financial trouble because you can’t pay your mortgage, the lender could sue you, but wouldn’t be able to take your 401(k) money to repay your debt.

If you don’t have a job with a retirement plan, you can roll over an old retirement plan into a new or existing traditional or Roth IRA, which is an Individual Retirement Arrangement. Even though it’s different than a 401(k), doing a rollover to an IRA within 60 days doesn’t trigger income tax or a penalty.

Since traditional retirement contributions are made on a pre-tax basis and Roth contributions are after-tax, you can only roll over workplace accounts into like accounts without triggering a tax consequence. For instance, you can roll over a traditional 401k into a traditional IRA and a Roth 401k into a Roth IRA.

Moving money from a traditional workplace account into a Roth IRA would be considered a Roth conversion, making you responsible for income tax on any amounts that weren’t previously taxed. So, I generally don’t recommend doing a Roth conversion because it can result in a huge tax liability.

Also, note that doing a retirement rollover is different than making an account contribution. So, the annual income thresholds that make high-earners ineligible to contribute to a Roth IRA don’t apply for rollovers.

Doing an IRA rollover is typically the best option for old retirement accounts because it gives you the most flexibility and control, and this is what I recommend for Sue. You choose the financial institution and have the freedom to pick from a wide range of investments. You’ll have a full range of options—such as stocks, bonds, and exchange-traded funds—that are typically not included on the investment menu for a 401(k).

Additionally, unlike with a workplace retirement account, there are situations when you can take money out of an IRA, before reaching age 59½, and avoid the expensive 10% penalty. Some exceptions include using IRA funds for medical expenses, college costs, and buying or building your first home. Just remember that you’ll still have to pay ordinary income tax on those withdrawals.

The major downside to rolling over an old retirement plan into an IRA is that depending on the state where you live, IRA assets may not be protected from creditors through ERISA, the law that I previously mentioned.

Whether creditors can touch some or all of your retirement money in an IRA varies from state to state. So, if protecting your retirement from creditors is a concern for you, be sure to ask your existing or potential new IRA custodian about your state’s regulations.

See also: Retirement Account Comparison Chart (PDF download) is a handy, one-page resource to learn more about different types of retirement accounts.

4. Not factoring in your age.

If you’re 55 or older, not taking special retirement withdrawal rules into account is a mistake. If you lose or quit your job in the year you turn 55 or later, you can take withdrawals from a retirement plan at work without having to pay the additional 10% early withdrawal penalty.

But if you do a rollover into an IRA or a new workplace retirement plan, you must wait until age 59½ to avoid the early withdrawal penalty. So, if you think you may need to access retirement funds between the age of 55 to 59½, it’s better to just leave your money in the old account.  

See also: 10 IRA Facts Everyone Should Know


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlersbook is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.