How to Roll Over Your 401(k): Knowing Your Options
It’s pretty easy to rollover your old 401(k) retirement savings to an individual retirement account (IRA), a new 401(k), or another option — yet millions of workers either forget to rollover their hard-won retirement savings, or they lose track of the accounts. Given that a 401(k) rollover typically takes minimal time and, these days, minimal paperwork, it makes sense to know the basics so you can rescue your 401(k), roll it over to a new account, and add to your future financial security.
Whether you’re starting a new job and need to roll over your 401(k), or are looking at what other options are available to you, here’s a rundown of what you need to know.
Key Points
• Rolling over a 401(k) to an IRA or new 401(k) is typically straightforward and your retirement funds will continue to have the opportunity to grow.
• Moving 401(k) funds to another 401(k) is often the simplest option and allows you to continue to have a higher contribution limit.
• Moving 401(k) funds to an IRA may provide more investment choices and control over those investments.
• Leaving a 401(k) with a former employer is an option but may involve additional fees and complications.
• Direct transfers are simpler and generally preferred over indirect transfers, which run the risk of incurring tax liabilities and penalties.
401(k) Rollover Options
For workers who have a 401(k) and are considering next steps for those retirement funds — such as rolling them to an IRA or another 401(k), here are some potential avenues.
Roll Over Money to a New 401(k) Plan
If your new job offers a 401(k) or similar plan, rolling your old 401(k) funds into your new 401(k) account may be both the simplest and best option — and the one least likely to lead to a tax headache.
That said, how you go about the rollover has a pretty major impact on how much effort and paperwork is involved, which is why it’s important to understand the difference between direct and indirect transfers.
How to Roll Over Your 401(k): Direct vs Indirect Transfers
Here are the two main options you’ll have if you’re moving your 401(k) funds from one company-sponsored retirement account to another.
A direct transfer, or direct rollover, is exactly what it sounds like: The money moves directly from your old account to the new one. In other words, you never have access to the money, which means you don’t have to worry about any tax withholdings or other liabilities.
Depending on your account custodian(s), this transfer may all be done digitally via ACH transfer, or you may receive a paper check made payable to the new account. Either way, this is considered the simplest option, and one that keeps your retirement fund intact and growing with the least possible interruption.
Another viable, but more complex, option, is to do an indirect transfer or rollover, in which you cash out the account with the expressed intent of immediately reinvesting it into another retirement fund, whether that’s your new company’s 401(k) or an IRA (see above).
But here’s the tricky part: Since you’ll actually have the cash in hand, the government requires your account custodian to withhold a mandatory 20% tax. And although you’ll get that 20% back in the form of a tax exemption later, you do have to make up the 20% out of pocket and deposit the full amount into your new retirement account within 60 days.
For example, say you have $50,000 in your old 401(k). If you elected to do an indirect transfer, your custodian would cut you a check for only $40,000, thanks to the mandatory 20% tax withholding.
But in order to avoid fees and penalties, you’d still need to deposit the full $50,000 into your new retirement account, including $10,000 out of your own pocket. In addition, if you retain any funds from the rollover, they may be subject to an additional 10% penalty for early withdrawal.
With all of that in mind, rolling over your money into a new 401(k) has some pros and cons:
Pros:
• Often the simplest, easiest rollover option when available.
• Should not typically result in any tax liabilities or withholdings.
• Allows your investments to continue to grow (hopefully!), uninterrupted.
Cons:
• New employer may change certain aspects of your 401(k) plan.
• There may be higher associated fees or costs with your new plan.
• Indirect transfers may tie up some of your funds for tax purposes.
Roll Over Your 401(k) to an IRA
If your new job doesn’t offer a 401(k) or other company-sponsored account like a 403(b), you still have options that’ll keep you from bearing a heavy tax burden. Namely, you can roll your 401(k) into an IRA.
The entire procedure essentially boils down to three steps:
1. Open a new IRA that will accept rollover funds.
2. Contact the company that currently holds your 401(k) funds and fill out their transfer forms using the account information of your newly opened IRA. You should receive essential information about your benefits when you leave your current position. If you’ve lost track of that information, you can contact the plan sponsor or the company HR department.
3. Once your money is transferred, you can reinvest the money as you see fit. Or you can hire an advisor to help you set up your new portfolio. It also may be possible to resume making deposits/contributions to your rollover IRA.
This option also has its pros and cons, however.
Pros
• IRAs may have more investment options available.
• You’ll have more control over how you allocate your investments.
• You could potentially reduce related expenses, depending on your specifications.
Cons
• May require you to liquidate your holdings and reinvest them.
• Lower contribution limit compared to 401(k).
• May involve different or higher fees and additional costs.
• IRAs may provide less protection from creditor judgments.
• You’ll be subject to new distribution rules – namely, you’ll need to be 59 1/2 before withdrawing funds to avoid incurring penalties.
Leave Your 401(k) With Your Former Employer
Leaving your 401(k) be – or, with your former employer – is also an option.
If you’re happy with your portfolio mix and you have a substantial amount of cash stashed in there already, it might behoove you to leave your 401(k) where it is.
You’ll also want to dig into the details and determine how much control you’ll have over the account, and how much your former employer might.
You might also consider any additional fees you might end up paying if you leave your 401(k) where it is. Plus, racking up multiple 401(k)s as you change jobs could lead to a more complicated withdrawal schedule at retirement.
Pros
• It’s convenient – you don’t do anything at all, and your investments will remain where they are.
• You’ll have the same protections and fees that you previously had, and won’t need to get up to speed on the ins and outs of a new 401(k) plan.
Cons
• If you have a new 401(k) at a new employer, you could end up with multiple accounts to juggle.
• You’ll no longer be able to contribute to the 401(k), and may not get regular updates about it.
Cash Out Your Old 401(k)
Cashing out, or liquidating your old 401(k) is another option. But there are some stipulations investors should be aware of.
Because a 401(k) is an investment account designed specifically for retirement, and comes with certain tax benefits — e.g. you don’t pay any tax on the money you contribute to your 401(k), depending on the specific type — the account is also subject to strict rules regarding when you can actually access the money, and the tax you’d owe when you did.
Specifically, if you take out or borrow money from your 401(k) before age 59 ½, you’ll likely be subject to an additional 10% tax penalty on the full amount of your withdrawal — and that’s on top of the regular income taxes you’ll also be obligated to pay on the money.
Depending on your income tax bracket, that means an early withdrawal from your 401(k) could really cost you, not to mention possibly leaving you without a nest egg to help secure your future.
This is why most financial professionals generally recommend one of the next two options: rolling your account over into a new 401(k), or an IRA if your new job doesn’t offer a 401(k) plan.
Pros
• You’ll have immediate access to your funds to use as you like.
Cons
• Early withdrawal penalties may apply, and there will likely be income tax liabilities.
• Liquidating your retirement account may hurt your chances of reaching your financial goals.
When Is a Good Time to Roll Over a 401(k)?
If there’s a good time to roll over your 401(k), it’s when you change jobs and have the chance to enroll in your new employer’s plan. But you can generally do a rollover any time.
That said, if you have a low balance in your 401(k) account — for example, less than $5,000 — your employer might require you to do a rollover. And if you have a balance lower than $1,000, your employer may have the right to cash it out without your approval. Be sure to check the exact terms with your employer.
When you receive funds from a 401(k) or IRA account, such as with an indirect transfer, you’ll only have 60 days from the date you receive them to then roll them over into a new qualified plan. If you wait longer than 60 days to deposit the money, it will trigger tax consequences, and possibly a penalty. In addition, only one rollover to or from the same IRA plan is allowed per year.
The Takeaway
Rolling over your 401(k) — to a new employer’s plan, or to an IRA — gives you more control over your retirement funds, and could also give you more investment choices. It’s not difficult to rollover your 401(k), and doing so can offer you a number of advantages. First of all, when you leave a job you may lose certain benefits and terms that applied to your 401(k) while you were an employee. Once you move on, you may pay more in account fees for that account, and you will likely lose the ability to keep contributing to your account.
There are some instances where you may not want to do a rollover, for instance when you own a lot of your old company’s stock, so be sure to think through your options.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
How can you roll over a 401(k)?
It’s fairly easy to roll over a 401(k). First decide where you want to open your rollover account, then contact your old plan’s administrator, or your former HR department. They typically send funds to the new institution directly via an ACH transfer or a check.
What options are available for rolling over a 401(k)?
There are several options for rolling over a 401(k), including transferring your savings to a traditional IRA, or to the 401(k) at your new job. You can also leave the account where it is, although this may incur additional fees. It’s generally not advisable to cash out a 401(k), as replacing that retirement money could be challenging.
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