How to Roll Over Your 401(k)

January 28, 2020 · 6 minute read

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How to Roll Over Your 401(k)

Just landed an exciting new gig? Congratulations! Making a career move can feel like a serious step in the right direction, not to mention all the cool new office mates you’ve yet to meet.

But while you’re nailing down your first-day outfit and reading over the employee handbook, there’s another important thing to take into consideration: What are you going to do with your old 401(k)?

While it’s totally possible to simply leave your old retirement account where it is and let it grow untouched, there may be reasons to think twice before doing so. Letting your 401(k) lie could mean leaving money on the table… not to mention racking up fees you didn’t even know you were paying.

“I would say the majority of people who have worked at previous employers and changed jobs leave their old 401(k)s,” said Jared Bolduc, a financial planner with SoFi. And unfortunately, this oversight may cause more harm than good.

“When you’re working for a company, they will typically bear the cost of a custodian to maintain the account,” said Bolduc. “When you leave, they typically transfer the burden of that cost to the individual, and you could potentially be paying more than you were before.”

When Is a Good Time to Roll Over a 401(k)?

As soon as you leave a job that holds a 401(k) retirement account for you, it’s helpful to understand all the options you have.

In most instances, you have 60 days from the date you receive an IRA or 401K distribution to roll it over into a new qualified plan before triggering tax consequences and one rollover per year is allowed under the rules.

Other than keeping it where it is, you can roll it over into a new 401(k) plan (provided a new employer offers one), cash it out altogether (although you’ll often pay fees and could face tax consequences to do this), or roll it over into a new IRA—an approach many financial professionals recommend doing sooner rather than later.

“Rolling over a 401(k) into an IRA isn’t always the best decision for everyone, but, depending on your unique circumstances, it might make a lot of sense because you get to take control of your money and dictate what it does,” said Bolduc. “It also usually will save a lot of money on fees and expenses when compared to leaving it.”

Related Content: How IRAs Work

But before a deep dive into the granular steps you’ll need to take to initiate the rollover, here are some available options. Because after all, everyone’s financial situation is different… and the smartest money moves are often those based on as much information as possible.

Option One: Leaving Your 401(k) Where It Is

As mentioned above, there may be some perils to leaving your 401(k) where it is when you move on to your new gig. Aside from those additional fees you might end up shelling out for, racking up multiple 401(k)s as you meander through a variety of companies over the course of your career could lead to a more complicated withdrawal schedule at retirement.

But is it ever a good idea to let sleeping 401(k)s lie? Sometimes, yes—so long as you know for sure what you’re getting and what you may be on the hook for.

For instance, maybe your old job was with a super-hip, savvy startup that chose a stellar plan with multiple investment options and low administration fees that stayed in place even after you left your job. 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.

Option Two: Cashing Out Your 401(k)

We get it: if you’ve socked away a good amount of cash over the course of your old job, it may seem tempting to take the money and run. But keeping your retirement savings is pretty darn important if you ever want to actually retire, and besides, you could face pretty serious tax penalties if you do give into temptation.

Because a 401(k) is an investment account designed specifically for retirement, and which the IRS has given certain tax benefits—for instance, allowing you to deduct your 401(k) contributions in the year they’re made—the account is also subject to strict rules regarding when you can actually access the money.

Specifically, if you take money out of your 401(k) before age 59.5, you’ll likely be subject to an additional 10% tax 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 that making the decision to access your 401(k) funds early may lead to a much bigger tax bill, not to mention possibly leaving you without a nest egg to hang up your hat one day in the future.

Which 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 401K plan.

Option Three: Rolling Your 401(k) Over to Your New Job

If your new job offers one, rolling your old 401(k) funds into your shiny, new 401(k) account may be both the simplest and best option—and the one least likely to lead to a tax time 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 without ever leaving the respective custodians’ hands. 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 slightly more complex, option, is to do an indirect transfer or rollover, in which you cash out the account with the express intent of immediately reinvesting it into another retirement fund, whether that’s your new company’s 401(k) or an IRA (which we’ll get into in more detail below).

But here’s the thing: 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 which, needless to say, could be tricky to scrape together. In addition, if you retain any funds from the rollover, they may be subject to an additional 10% penalty for early withdrawal.

Option Four: Rolling Your 401(k) Into an IRA

If your new job doesn’t offer a 401(k) or other company-sponsored account, don’t worry: You still have options that’ll keep you from bearing a heavy tax burden. Namely, you can roll your 401(k) into an IRA, or Individual Retirement Account—and it’s pretty darn easy, too.

In fact, we offer an IRA program here at SoFi that could be a viable option to transfer your existing 401(k) funds.

You’ll also benefit from the availability of complementary support from real advisors like Bolduc who are there to assist in every step of the rollover process.

The entire procedure essentially boils down to three steps:

1. Open a new IRA for your old account holdings to eventually get transferred into.

2. Contact the company that currently holds your 401(k) funds and request to 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, depending on various factors (type of plan, reason for leaving position, age, etc.) that can assist you in this process.

3. Once your money is transferred, supervise its management with professionals like SoFi’s team of financial planners, who will work with you to make investments and modifications to your account based on your risk tolerance and needs.

While it’ll take making a few phone calls and doing some paperwork, in the long run rolling over your 401(k) might be a smarter financial move, helping you hit your retirement goals. And who doesn’t want that? If you are wondering where you stand on your retirement goals, try using this retirement calculator to see if you are on the right track.

Not sure which rollover strategy is right for you? SoFi Invest® is all about empowering you and your financial future, and we’re here to help. Schedule a free personal consultation with one of our licensed financial advisors who can answer your questions.

Schedule a complimentary appointment with a SoFi Invest advisor.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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