What High-Income Earners Should Do with an Old 401(k)

If you have switched employers recently or retired, you may have a 401(k) account with your former employer. For high-income earners, deciding what to do with an old 401(k) is not just a matter of convenience or what appears easiest, but a question of taxation strategy.

Before you decide to roll it over, cash it out, or leave it behind, it’s important to understand your options and the potential tax consequences of each.

Option 1: Leave the 401(k) Where It Is

Most employer plans allow you to leave your money behind after you leave the company (as long as your balance is typically over $5,000). That can sometimes make sense if:

• The plan offers low-cost institutional investment options

• You’re happy with the investment menu

• You want to maintain ERISA-level creditor protection

However, if you earn a high salary, there are possible downsides to leaving your money in an old 401(k):

• You lose flexibility in managing your investment strategy

• You can’t easily consolidate with other accounts

• And if your plan allows after-tax contributions, you could miss a big tax-free growth opportunity

We'll come back to that last one because it's a common (and expensive) mistake.

Option 2: Roll It Into an IRA, But Be Careful

The most common option is to roll over the old 401(k) into an individual retirement account, or IRA, which usually provides:

• More control over your investments

• More investment options (ETFs, mutual funds, and alternatives)

• Simplified management of your retirement accounts

However, for high-income earners, this move can backfire if you ever plan to use the Backdoor Roth IRA strategy.

Here’s why: When you roll pre-tax funds from a 401(k) into a traditional IRA, it adds to your IRA balance. Once you have pre-tax money in an IRA, the pro-rata rule applies, meaning any future Roth conversions (like through a Backdoor Roth) will be partially taxable based on the ratio of pre-tax to after-tax dollars across all your IRAs.

In short: If you want to keep doing the Backdoor Roth IRA, consider rolling your old 401(k) into your new employer’s 401(k) instead of an IRA. Rolling the funds over to an IRA could accidentally make future conversions more expensive.

Option 3: Roll It into a New 401(k)

If your new employer’s plan is high quality, you can often roll your old 401(k) into it. This option allows you to:

• Keep your Backdoor Roth strategy intact: 401(k) assets don’t count toward the pro-rata rule

• Consolidate accounts for easier management

• Maintain creditor protections

Just make sure the new plan includes the investment options you want and has reasonable costs before making the move.

The Hidden Opportunity (and Risk) of After-Tax Contributions

If your old 401(k) allowed after-tax contributions, you could have a unique opportunity for tax-free growth if handled correctly.

After-tax contributions are different from Roth contributions:

• After-tax 401(k) contributions are made with post-tax dollars (like Roth), but their earnings grow tax-deferred, not tax-free.

• That means when you eventually withdraw the money, the growth is taxable, even though your original contributions aren’t.

Here’s the key issue:

If you leave your after-tax contributions in your old 401(k), the gains on those funds will continue to grow tax-deferred, meaning they’ll be taxed later when withdrawn. You’re missing the chance to move that money into a Roth IRA, where both the contributions and the future growth could be completely tax-free.

If you instead roll over properly, you can split your funds:

• The after-tax contributions go directly into a Roth IRA (tax-free).

• The pre-tax funds go into a traditional IRA or another 401(k).

By splitting the rollover, you can potentially optimize tax-free growth and keep the Backdoor Roth option in place, if you rollover the tax-deferred funds to the new 401(k).

If your old 401(k) allows it, you may want to try to do a conversion of the after-tax funds into  Roth 401(k) as well.

Example: Why This Matters

Let’s say you are 45 years old and have $1,000,000 in your old 401(k), with $200,000 of that coming from after-tax contributions.

• If you leave the account where it is, the $200,000 will keep growing tax-deferred, meaning you’ll owe taxes on the gains later.

• If you roll everything into a traditional IRA, you’ll blend the pre-tax and after-tax money together, losing the ability to separate the two.

• But if you split the rollover, sending $200,000 to a Roth IRA and $800,000 to a traditional IRA or new 401(k), that $200,000 can now grow tax-free forever.

Now, let’s look at what that could mean in real numbers.

Assume you’re 45 today, and that $200,000 grows at 6% per year until age 65, a period of 20 years. Using compound growth, your $200,000 after-tax portion could grow to about $641,000.

Here’s where the difference really shows up:

If you left it in the 401(k), you would owe taxes on roughly $441,000 of gains when you withdraw the money in retirement. Assuming a 25% effective tax rate, that’s about $110,000 in taxes due to the IRS.

If you rolled the $200,000 into a Roth IRA, the entire $640,000, both your contributions and the growth, would be completely tax-free in retirement.

Leaving After-Tax contributions in a tax- account can deferred be an issue

That’s a $110,000 difference in spendable money just from handling the rollover correctly.

In addition to having extra money:

• Roth assets don’t have Required Minimum Distributions (RMDs), giving you more control over your income and tax bracket in retirement.

• Tax-free growth inside a Roth also means no impact on Medicare IRMAA thresholds or Social Security taxation down the road.

The difference in tax-deferred vs. tax-free could mean six figures in lifetime tax savings and far more flexibility in your retirement income plan.

Final Thoughts

If you’re a high-income earner, what you do with an old 401(k) can have a major impact on your long-term tax picture. Rolling it over the wrong way can eliminate Backdoor Roth opportunities or trap your after-tax contributions in a tax-deferred account.

Before you take action, check your old plan for after-tax balances and Roth subaccounts, and understand how your decision affects your broader tax and retirement strategy.

If you have an old 401(k), it’s worth reviewing your options before making a move. The tax details can make all the difference.

- Steve Balch, CFP®

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When You’re Ready to Take the Next Step, Here’s How I Can Help You:

1. Work with me. If you’re a high-income earner or retiree and want to learn how we help people like you retire confidently and take control of your financial life, click here to schedule a call with me.

2. Ask me a financial question. If there’s something you’ve been wondering about financially - taxes, investments, retirement, or anything else - send me a message on LinkedIn. I’m happy to discuss and help you find clarity.

3. Download my free eBook — How to Reduce Your Lifetime Tax Bill. This guide is filled with actionable tax-planning strategies to help high-income earners and retirees keep more of what they’ve worked hard for. You’ll learn practical ways to minimize taxes, optimize withdrawals, and build a smarter, more efficient retirement plan. Download here.

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Frequently Asked Questions About Old 401(k) Rollovers

Should I roll my old 401(k) into an IRA? It depends on your goals. An IRA gives you more investment control, but it can interfere with Backdoor Roth conversions. If you plan to use Roth strategies, rolling into your new employer’s 401(k) might be better.

Can I keep my money in my old 401(k)? Yes, but it can limit flexibility, and if you have after-tax contributions, leaving them behind means your gains will grow tax-deferred instead of tax-free.

What happens to after-tax contributions when I roll over? If you separate them correctly, you can send the after-tax portion to a Roth IRA (tax-free) and the pre-tax portion to a traditional IRA or new 401(k).

What is the pro-rata rule? It’s an IRS rule that makes Roth conversions partially taxable if you have both pre-tax and after-tax money in IRAs. Avoiding this rule is key for high-income earners using the Backdoor Roth strategy.

How do I know if my 401(k) includes after-tax contributions? Check your plan statement or ask your HR department. Look for a section listing pre-tax, Roth, and after-tax contribution balances separately.