Switching jobs is always an exciting change, but it also comes with logistical tasks like what to do with your 401(k) from your previous employer.
In this comprehensive guide, we’ll explain the key considerations and steps involved in rolling over or transferring your 401(k) funds to your new employer or an IRA.
Let’s dive in.
Understanding 401(k) Rollovers
When you leave a job, you have a few different choices regarding what to do with the money in your 401(k) account from that employer. The most common options are:
Leave the money where it is: You can choose to leave your 401(k) assets in your former employer’s plan if the plan balance is over $5,000. However, once you separate from the company you will no longer be making contributions to that account. You also won’t be able to take advantage of potential lower fees or better investment options that may be available elsewhere.
Roll over to new employer’s 401(k): If your new employer offers a 401(k) plan, you can roll over the funds from your previous employer into the new employer’s 401(k) plan. This keeps your retirement savings in a tax-advantaged 401(k) account. Just be sure to compare the investment options and fees between the two plans.
Roll over to a Traditional or Roth IRA: You have the flexibility to roll over your 401(k) funds into a Traditional or Roth IRA. IRAs typically offer more investment choice compared to 401(k)s. Be aware that with a Roth IRA, any pre-tax money rolled over will be taxed in the year of the rollover.
Cash out the 401(k): Cashing out the funds results in paying income taxes on the amount withdrawn plus a 10% penalty if you’re under age 59.5. This should really only be an emergency last resort since it destroys the tax-advantaged growth of the money.
Whenever you roll funds over from one retirement account to another, it is considered a “60-day rollover”. This means you have 60 days from the date you receive the funds to complete the rollover without creating a tax problem. Any amount not rolled over within 60 days becomes a taxable distribution.
Comparing 401(k) Rollover Options
Now let’s examine the key advantages and disadvantages of each rollover path in more detail:
Leave the 401(k) Where It Is
- Simple option that requires no action on your part
- Money remains in a tax-advantaged retirement account
- Limited investment options and potentially higher fees
- No ability to make additional contributions
- Will still need to manage multiple accounts from different employers
Roll Over to New Employer’s 401(k)
- Consolidates retirement savings into one account
- Money stays in a tax-advantaged 401(k)
- May get employer match on new contributions
- New plan may have inferior investment options or higher fees
- Less control over investment choices than an IRA
Roll Over to a Traditional IRA
- Wide variety of investment options to choose from
- Typically lower annual account fees than 401(k)s
- More control over investments
- Can choose from multiple IRA providers
- No employer match on new contributions
- Annual IRA contribution limits are lower than 401(k) limits
- Required minimum distributions begin at age 72
Roll Over to a Roth IRA
- Earnings grow tax-free
- Qualified withdrawals in retirement are tax-free
- More investment options and control than a 401(k)
- Pre-tax rollover amount is taxed in the year of conversion
- Annual contribution limits are lower than 401(k)s
- Income limitations on ability to contribute
Cash Out the 401(k)
- Immediate access to cash
- Income taxes owed on distributed amount
- 10% early withdrawal penalty if under age 59.5
- Money withdrawn loses its tax-advantaged growth
As you can see, there are benefits and drawbacks to each option. The best choice will depend on your individual needs, goals, and specific financial situation. With informed analysis, you can select the approach that makes the most sense.
Comparing 401(k) Provider Fees and Expenses
One important factor to consider when deciding whether to roll over your 401(k) is the fees and expenses associated with leaving your money in the previous employer’s plan versus moving it. Finding out the specific costs is critical for making an apples-to-apples comparison.
Some key questions to ask your former employer’s 401(k) provider include:
- What is the annual administrative/recordkeeping fee?
- What are the fund expense ratios for the investment options?
- Will I be charged a termination or transfer fee for removing my balance?
- Are there any fees for processing a distribution or rollover request?
- How does customer service support work once I’m no longer an active employee?
Then be sure to obtain fee information from potential IRA providers or your new employer’s 401(k) plan to compare total costs. Understanding expenses is vital, as small percentage differences can significantly impact your retirement savings over time. In many cases, an IRA or new employer’s lower-cost plan may justify a rollover.
Rolling Over Your 401(k) Funds – The Process
Now that you’ve weighed your options and done the necessary research, here are the step-by-step instructions for completing a 401(k) rollover:
- Request a rollover/distribution form from your former employer’s plan administrator. There may be online or paper versions to choose from.
- Decide whether to do a direct or indirect rollover. A direct rollover moves money directly to your new account, avoiding tax withholding. Indirect means a distribution is paid to you, with 20% withheld for taxes.
- Indicate on the form whether you want a direct rollover and provide the details of your new retirement account. This could be a new 401(k),IRA, or Roth IRA.
- Mail or fax the completed form and other required documents to your previous plan administrator based on their guidelines.
- For a direct rollover, your money will be transferred directly into your new account within 3 to 4 weeks. You’re done!
- For an indirect rollover, a check will be mailed to you. Deposit it into your new retirement account within 60 days to avoid taxes and penalties.
- Monitor your old and new accounts to ensure the transaction went through as expected. Request statements as needed from both parties.
Taking these logical steps helps ensure a smooth rollover process. Be sure to meet the 60-day deadline to avoid potential tax implications. With the right information and paperwork, transitioning your 401(k) is straightforward.
Other Considerations for 401(k) Rollovers
There’s a bit more to think about when deciding how to handle your old 401(k):
- Consider consolidating to simplify managing multiple accounts
- Roll over company stock separately to avoid potential capital gains taxes
- Compare your beneficiary designations between accounts
- Contact a tax advisor if you have questions about the tax impact
- Check if your former employer offers any financial advice resources
- Monitor your accounts periodically to ensure accurate transactions
Leaving a job is a life transition with many moving parts. Taking the time up front to fully understand the 401(k) rollover process eliminates uncertainty down the road. The right plan for your needs may vary throughout different career stages as well. With diligent research, you’ll feel confident taking the next steps for your retirement savings.
Switching jobs provides both opportunity and responsibility when it comes to your retirement savings in a 401(k). This comprehensive guide has explained the key factors to evaluate like fees, investment options, and tax implications when deciding whether to roll over funds to a new employer plan, IRA, or keep the money where it is.
By comparing the options using the strategies discussed, you’ll select the approach most suitable to achieve your long-term financial goals. Taking a thoughtful, informed approach results in a smooth 401(k) transition process between employers. With the right information, tools, and action plan, you can feel empowered moving your retirement savings into the next phase.