I had completely forgotten about an old 401(k), so I asked a financial planner what to do with it (2024)

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• I have a 401(k) from an old job, so I asked a financial planner what to do with the funds.
• Since I'm self-employed, he suggested I put the funds in a traditional IRA or a Roth 401(k).
• If I had another employer, I could also roll the funds into a 401(k) through my employer.

I'm spending quality time before the end of the year combing through my finances to find anything that needs to change or improve. I want to close out 2023 by fixing any lingering money mistakes or to-do list items that I should have taken care of months or years ago.

When I was looking through my current retirement fund, I remembered that I had an old 401(k) from a job I was laid off from in 2015. I haven't thought about the money inside of that account in years. It's hardly growing and I haven't contributed to it since I lost that job.

Unsure of what to do with the money inside that old 401(k), I chatted with certified financial planner Faron Daugs for advice. Here are three suggestions he shared for anyone who has old retirement funds from previous jobs.

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1. Roll your old 401(k) into your current employer's plan

While this option doesn't apply to me because I'm self-employed, one route that Daugs suggested is rolling your old 401(k) plan into the 401(k) plan offered by your current employer. People change jobs all the time, so Daugs often sees people who have multiple 401(k) plans with money in each of them. While you could keep these 401(k) plans separate, Daugs said there are small benefits that could come from merging these plans.

"Combining your 401(k) plans into one can help you consolidate funds and potentially stop paying extra fees that could be associated with managing two separate 401(k) plans," he said.

2. Roll your old 401(k) into a traditional IRA or Roth 401(k) at an outside custodian

If your current employer doesn't offer a retirement contribution plan or you want to take your money out of a 401(k) and put it in a different type of retirement fund, Daugs recommended rolling the money directly into a traditional IRA or Roth 401(k).

A traditional IRA is a retirement account where the money in the account is generally pre-tax and grows tax-deferred. A Roth 401(k) is similar to a Roth IRA and a 401(k), where you make post-tax contributions and earnings inside the account grow tax-free.

There are a few benefits of going this route.

First, Daugs said that if you had money in an old 401(k) and wanted to use that cash to buy an individual stock that you feel has long-term growth potential, you can do that within a traditional IRA or Roth IRA plan. He said that this isn't something you can generally do under a 401(k) umbrella.

If you roll the money over, which means directly transferring it from your 401(k) into an IRA, you're able to keep the money tax-deferred and avoid early withdrawal penalties. Daugs also said going this route means you won't get taxed on any distributions from your old 401(k) plan.

However, Daugs said that if the money you put into your old 401(k) was pre-tax money, you want to be sure to roll that into a traditional IRA. "If the money originally contributed was a Roth 401(k) contribution, you roll it to a Roth IRA. If you convert the IRA to a Roth later on, and you roll that money from an IRA into a Roth IRA, you would get taxed on the amount converted, but would not have to pay a penalty for moving it out of a 401(k)."

"The benefit of doing a conversion is that going forward, all of the money inside of that IRA or Roth IRA grows tax-free," he said. "So someone in their twenties or thirties doing this can benefit 20 to 30 years down the road to have a tax-free bucket of money to eventually tap into."

This is worth considering when you're doing your financial planning, Daugs said, because that money in a 401(k) is often pre-tax money.

"That means the money in your 401(k) will grow tax-deferred and when it comes time to take the money out when you're retired, you will pay taxes on the distribution," he said.

3. Use the money for another investment — but watch out for hefty fees

If you already have a well-funded retirement account and want to use the idle money in an old 401(k) for a different type of investment outside of a retirement plan, Daugs said you can withdraw the money, but likely at a cost.

"You will have to pay income tax on the money you take out of your 401(k) as well as a penalty for withdrawing the money before retirement age of 59½," he said.

Instead, he recommended that if you want to use the 401(k) money to invest in the best CDs with higher than usual interest rates, you can do so by rolling the money into an IRA that's at a bank and that offers those types of investments.