Like many of us, you may have accumulated a few employer-sponsored accounts, such as a 401(k) or health savings account (HSA), during your working life. If you decide to become self-employed, you could simply leave those accounts where they are. Before you make any decisions, though, be sure to know your options-and the potential impact on your long-term savings strategy.
4 options for a 401(k) from a former employer
Here are choices to consider for an old 401(k) from a prior job:
- Keep your money where it is (if allowed) – Continues tax-deferred growth potential, but you can no longer contribute to the plan.
- Roll over your 401(k) to an IRA – Consolidates 401(k)s into one account, such as a rollover IRA, while continuing tax-deferred growth potential.
- Roll over to your own small business retirement plan (if allowed) – Consolidates 401(k)s into a new workplace retirement account, like a SEP IRA or self-employed 401k, much like you would do if you were switching jobs to another employer while continuing tax-deferred growth potential.
- Cash out – Subjects cash to state and federal taxes and, before age 59½, a 10% withdrawal penalty may apply.
Continuing to save with a SEP IRA or self-employed 401(k)
Whatever you decide to do with older plans, being self-employed means you can continue to save for retirement with accounts designed for you. For example, a Simplified Employee Pension Plan (SEP IRA) or self-employed 401(k) can help self-employed individuals or small-business owners save as much as $69,000 in tax-year 2024 for retirement in a tax-advantaged way. If you are a sole proprietor, a business owner, or in a partnership; or if you earn self-employment income by contracting or freelancing, a SEP IRA or self-employed 401(k) may fit your needs.
Not sure which plan is right for your retirement needs? Take our 5-minute quiz to find out which may fit your needs.
Don’t forget your health savings account (HSA)
If you have an HSA, you may want to consider what to do with that as well. Remember, any savings in your HSA aren’t “use it or lose it”—your money can accumulate year over year. And at age 65, you can spend your HSA dollars on anything, without incurring a 20% penalty (withdrawals not spent on qualified medical expenses will be taxed as income at your current tax rate).
Tip: According to research by Fidelity Financial Solutions, you should plan on factoring in approximately 15% of your retirement expenses will be related to health care expenses, year in and year out. In general, the more health issues you expect, the higher the retirement income replacement rate you may want to work into your retirement income plans.
Source: Consumer Expenditure Survey data 2023, average US retiree health care expenses by age.
Combining your retirement and health savings accounts under one roof is one option to consider; however, before making any decision, be sure to understand and compare all details of any HSA provider’s offering, including investment options, fees, account minimums, potential earnings on cash holdings, and even customer service.