401(k) Rollover Options

When you leave your job, you have a few options for what to do with your old 401(k). You can roll over the account’s value into a 401(k) at your new job or roll it over into an individual retirement account (IRA). You could also keep your 401(k) with your former employer or cash it out.

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    Jennifer Schell, CAS®

    Financial Writer, Certified Annuity Specialist®

    Jennifer Schell is a professional writer focused on demystifying annuities and other financial topics including banking, financial advising and insurance. She is proud to be a member of the National Association for Fixed Annuities (NAFA) as well as the National Association of Insurance and Financial Advisors (NAIFA).

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  • Updated: November 7, 2023
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What Is a 401(k) Rollover?

Leaving one job and starting another can be an exciting time of change. One of the big questions during this transition is what to do with your 401(k) retirement plan.

You can move your retirement savings to another account via a rollover, which means directly transferring the value of your retirement account to another qualified retirement plan.

In most cases, you’ll have the option to roll over your 401(k) into a new 401(k) with your new employer or into an individual retirement account (IRA). No matter which rollover account you choose, you’ll keep all your contributions to the 401(k) as well as any employer contributions or accumulated earnings.

401(k) Rollover Options

Your new employer may offer their own 401(k) plan that you can roll your old retirement plan over to. This makes saving for retirement easy, because you can keep track of all your savings in one place and have the convenient automatic deposits and vesting that 401(k)s provide.

Before you make the move to a new retirement plan, you should look closely at the features of the plan. Does it offer enough investment options to choose from? How much will you be paying in fees? A direct rollover to a new 401(k) might be the most convenient option, but it may not be right for you.

You can also make an in-service 401(k) rollover. This is when you transfer the assets in your current 401(k) into an IRA while you are still working for your current employer.

Another alternative is to roll your 401(k) into an IRA instead of the new job’s retirement plan. IRAs are not tied to your employer, so you can continue contributing to them no matter your employment status.

If you prefer to choose your own investment funds, an IRA might be a better choice for you. Putting your retirement investments into an IRA offers greater flexibility than you can get from a 401(k).

Unlike a 401(k), an IRA doesn’t limit your investment options, so you can have a more diverse portfolio. Some people find that they can get more out of their retirement savings with an IRA by investing in assets with lower fees and greater returns than what’s offered by their 401(k) plan.

IRAs also have more flexibility for withdrawals than most 401(k)s. Depending on the terms of your plan, your 401(k) might not allow you to take a withdrawal whenever you want. Some plans have an “all or nothing” rule that requires plan participants to keep their money in the plan or withdraw it all at once. IRAs are individually managed, so you can make withdrawals at any time.

When you make a withdrawal from your 401(k) plan, most plan administrators will simply take an equal amount out of each investment that makes up your portfolio. But if you’re withdrawing from an IRA, you can choose to take the money out of whatever funds you want and let the rest of your portfolio continue to grow.

What to do with your old 401(k) comes down to what your options look like and what matters most to you. If getting the best returns is your top priority, compare the investment options, fees and returns of your old plan, new plan and IRA options to find which will help you maximize your retirement savings.

If you value convenience, initiating a direct rollover of your plan to your new employer’s 401(k) plan can be fast and easy.

How To Roll Over a 401(k) to a New Employer

Most of the time, you’ll be able to complete a direct rollover to move your 401(k) into your new employer’s plan. A direct rollover means your former company will send the check in the amount of your 401(k)’s account value directly to your new employer, so you won’t have to manage the transition yourself.

The first step is to contact the plan administrator of your old 401(k). You’ll want to ask for a direct rollover, and your administrator might give you two options for transferring the funds. You may be able to choose which investments you want before completing the rollover, or you can just rollover the lump sum balance of the account and allocate your investments later.

No matter which option you choose, your plan administrator can help you complete the required paperwork. Once that’s done, you’ll ask them to send the full value of your account directly to the administrator of your new 401(k), either via check or electronic transfer.

How To Roll Over a 401(k) to an IRA

If you are rolling over your 401(k) to an IRA, your first step will be opening an IRA account, unless you already have one. You can choose a traditional IRA or a Roth IRA for your rollover. Which type of IRA is best for you will depend on what type of 401(k) you have. A traditional 401(k) should be rolled over to a traditional IRA, and a Roth 401(k) should be rolled over to a Roth IRA.

Take some time to shop around and compare different IRA accounts before you choose. You’ll want to look at things like investment options, withdrawal flexibility, fees and customer service among different banks or brokerage firms that offer IRAs. Once you decide, you can open your IRA account, usually by filling out an online application.

You usually have two options when it comes to IRA rollovers. If your former employer allows it, the best and safest way to complete the transfer is through a direct rollover. Just like a direct rollover to another 401(k), your former employer will send the money directly to the financial institution that holds your IRA.

The other option is an indirect rollover. This type of transfer involves your employer sending you a check for the balance of your old 401(k) account. It’s then up to you to deposit the check yourself with your IRA provider.

You can perform a direct rollover at any time, but the rules for indirect rollovers are different. Once you receive the distribution from your former employer, the IRS requires you to complete the transfer within 60 days, or you’ll have to pay taxes on the distribution amount and an additional 10% penalty for early distributions.

Other 401(k) Options

When you leave your job, you’ll also have the option to cash out your 401(k), but this is usually not recommended. If you choose to cash out your retirement fund, your employer will withhold 20% of your account’s balance to pay for the taxes you’ll owe.

Cashing out will also incur an early withdrawal penalty if you’re younger than 55, so you’ll have to pay an additional 10% of your 401(k) balance to the IRS along with federal, state and local taxes.

For these reasons, cashing out your 401(k) is usually not the way to go. An exception is if you have only a small amount of money in your account. Employers are not required to provide a rollover option and can choose to cash out your account for you if your balance is less than $1,000.

You may choose to leave the 401(k) fund with your old employer if you prefer the investment options that plan offers. However, if you’re still early in your career, it’s likely that you’ll change jobs again and again before you retire. Leaving a trail of old 401(k)s behind at each job poses the risk that you might lose track of those accounts and not be able to access them when you need to.

Frequently Asked Questions

What is a 401(k)?

A 401(k) plan is a retirement savings plan sponsored by employers. Contributions to a 401(k) are pre-tax payroll deductions that can grow tax-deferred until the funds are withdrawn.

Do you lose money when you roll over a 401(k)?

As long as the funds are transferred to a qualified retirement account, such as another 401(k) or an IRA, you should not lose any of the money in your account.

How long do I have to move my 401(k) after leaving a job?

You can initiate a direct rollover of your 401(k) at any time after you switch jobs or retire. If you receive a retirement plan distribution through an indirect rollover, the IRS requires you to deposit the distribution in another qualified retirement plan within 60 days to avoid taxes.

What happens if I don’t roll over my 401(k) from my previous employer?

You can leave your 401(k) money with the old employer’s plan. However, you won’t be able to contribute to the plan anymore, and it may be hard to keep track of the account as time goes by.

Can I cash out my 401(k) after leaving my job?

Cashing out your 401(k) is an option, but it is not recommended due to the high penalties for early withdrawals and tax consequences.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: November 7, 2023
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