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How to Transfer Your 401(k) When Changing to a New Job: 401(k) Rollover Guide

January 22, 2021 · 6 minute read

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How to Transfer Your 401(k) When Changing to a New Job: 401(k) Rollover Guide

It’s easy to forget about old 401(k) plans when changing to a new job. Some people simply forget about it because the company that manages it never reminds them. Others didn’t forget about their old account, but they’ve been putting off the rollover because it sounds hard.

Many companies don’t make the process easy for customers to roll over their 401(k) accounts from previous jobs. But it can be worth the inconvenience.

By not rolling it over, you might be losing some serious cash. That’s right—losing money, so it’s easy to miss. Here are a few key reasons to prioritize a 401(k) rollover.

3 Reasons to Transfer Your 401(k) to a New Job

There are three main reasons to rollover a 401(k):

1. To reduce fees. If the fees are too high with your previous employer’s 401(k), rolling over a 401(k) can be advantageous.
2. To maximize your money. If you aren’t happy with the investment options in your old 401(k) and your new employer accepts rollover 401(k)s, you might be able to save money while investing in a broader range of investment vehicles.
3. To streamline your investments. If you leave your 401(k) where it is, you may not think about it very often. It’s important to keep tabs on all of your investments so you can make sure they are on track and appropriate for your time horizon and goals.

You May Be Paying Hidden Fees

There are all sorts of fees that go into effect when you open a 401(k), including recordkeeping fees, maintenance fees, and fund fees. Expressed in a percentage, these fees inform the expense ratio of a plan.

Employers may cover those fees until you leave the company. Once you’re gone, that cost might shift to you without you even realizing it.

Fees matter: When you pay a fee on your 401(k), you’re not just losing the cost of the fee; you’re also losing all the compound interest that would grow along with it over time. The sooner you roll your plan over, the more you could potentially save.

You Might Be Missing Out on Better Investments

401(k) accounts grow at different rates depending on which assets you invest in. If the retirement savings plan at your new company—or an individual retirement plan (IRA)—offers a selection of stocks and bonds that better aligns with your financial goals, it might be time to initiate a rollover.

The money that’s sitting in your old 401(k) could potentially grow at a faster rate if you roll it over into a new plan or into an IRA—it’s certainly worth investigating the growth rates of each. Keep in mind that investors can lose money when investing, too, so it always makes sense to consider your personal risk tolerance when deciding how to invest your retirement accounts.

You Could Lose Track of the Account

It’s not your fault, it’s just logistics. It’s harder and more time-consuming to juggle multiple retirement accounts than it is to juggle one. Until you retire, you’ll be managing two (or more) websites, two usernames and passwords, two investment portfolios, and two growth rates for decades.

And if you leave this next job to go to a third (or a fourth, or a fifth), the 401(k) plans could pile up, creating even more tracking work for you. Plus, when you’re no longer with an employer, you might miss alerts about changes that may occur with an old retirement plan.

What to do With Your 401(k) After Getting a New Job

While it’s generally allowed to leave your account in your former employer’s plan when you switch jobs, there are other options.

•  Cash out the account. If you take this route and you’re younger than 59½ years old, you will owe taxes and might also owe early withdrawal penalties depending on how you use the money.
•  Roll over the 401(k) account. You could roll the account into your new employer’s retirement plan (if allowed) or into an IRA.

Cashing Out Early

Should you choose to cash out your 401(k), you will have to pay taxes on the money, and perhaps an additional 10% early withdrawal fee.

That said, there are some circumstances when the 10% fee is waived (but not the income tax), such as when the funds will be used for eligible education expenses, certain medical expenses, or expenses related to a first-time home purchase, among other circumstances.

Rolling Over a 401(k) to Your New Employer’s Plan

The process of rolling over a 401(k) might seem intimidating or inconvenient at first, especially if you’re moving onto your second job and this is the first time you’ll be rolling over a 401(k). In actuality, the actual process of rolling over a 401(k) isn’t too complicated once you’ve decided where your existing funds are going to go.

Advantages of Rolling Over Your 401(k)

Rolling over your 401(k) to a new plan can be advantageous to your overall financial plan. Here are a few ways this transition might be beneficial to your financial well-being.

One Place for Tax-Deferred Money

Transferring your 401(k) to your new employer’s plan can help consolidate all of your tax-deferred dollars into one account. Keeping track of and managing one account may simplify your money management efforts.

A Streamlined Investment Strategy

Not only does consolidating your previous 401(k) with your new 401(k) make money management easier, it can also streamline your investment strategies.

Financial Service Offerings

Some 401(k) plans offer financial services, such as financial advisor consultations, to help employees achieve their retirement goals. If your previous employer didn’t offer this service and your new plan does, taking advantage of this offering may help you achieve an investment plan that meets your exact goals rather than a standardized option.

Access to a Roth Option

An increasing number of employers are offering a Roth 401(k) option in addition to the traditional 401(k) option. With a Roth 401(k), the money you contribute is after-tax—it doesn’t minimize your taxable income. But when you take distributions in retirement, you won’t have to pay taxes on the withdrawal amount. As long as the account has been open for five years and you’re over 59 ½, you can receive tax-free distributions.

A Roth 401(k) option can be appealing if you feel your income in retirement will be higher than your current income. If your new employer offers this benefit and you think it will be advantageous to your financial situation, then rolling over your 401(k) to a Roth 401(k) plan may make sense.

How to Roll Over Your 401(k)

So, how do you transfer your 401(k) to a new job? If you decide to roll your funds into your new employer’s 401(k), you’ll most likely need to:

1. Contact the plan administrator to arrange the rollover. You may need to choose the types of investment you would like before you initiate the rollover. If not, you can take a lump-sum transfer and allocate the funds gradually to different investments of your choosing.
2. Complete any forms required by your employer for the rollover.
3. Request that your former plan administrator send the fund via electronic transfer or a check so you can move the funds directly to the administrator of the new plan.

It’s possible that you might have to wait until your employer’s next open enrollment period to complete the rollover, but you might consider using that time to research the plan’s investment options so you’ll be ready when the time comes.

Rolling Over a 401(k) Into an IRA

If you choose to roll your 401(k) funds into an IRA that’s not employer-sponsored, a direct rollover is the method that takes most of the guesswork out of the transfer. This means that the funds will be taken from your previous account and rolled directly into the new account.

Doing it this way should avoid your previous lender sending you a check and resulting in any unforeseen early withdrawal tax situations.

Opening a new retirement account online is fairly straightforward, but there are some steps to opening an IRA that might be worth reviewing before you start. Once your funds are rolled over, you’ll be able to choose the investments that work for your retirement goals.

401(k) Rollover Rules

When requesting a transfer, you may either select a direct and indirect rollover. With a direct rollover, the check is made out to the financial institution (for your benefit). Because the funds are directly deposited into the new account, no taxes are withheld.

With an indirect rollover, the check is payable to you, with 20% withheld for taxes. You’ll have 60 days to roll over the funds (80% of your previous plan) into an IRA or other retirement plan. If you want to contribute the full amount of your previous plan, you can add money to bring the lump contribution back up to the balance before rollover. At that point, you’d be able to count the 20% withheld as taxes paid.

The Takeaway

There are many benefits to rolling over a 401(k) after switching jobs, including streamlining your retirement accounts and directing your money so that it suits your individual financial needs and goals. While some may view it as inconvenient, it’s actually a straightforward process whether you want to roll over a 401(k) into your new employer’s plan, or into an IRA.

Not sure which rollover strategy is right for you? SoFi Invest® offers retirement savings plan options. With a SoFi Roth or Traditional IRA, investors have access to a broad range of investment options, member services, and our robust suite of planning and investment tools.

Find out how to take control of your retirement options with SoFi Invest.


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