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Understanding Your 401(k) Rollover Options


You just landed a new job, and with it, an opportunity to move your career forward. Now comes an important decision: what should you do with your 401(k) from your former employer? While you can choose to leave your 401(k) with your former company, you may also consider rolling it over into an individual retirement account (IRA), a 401(k) at your new company or even cashing it out. A financial advisor could help you pick the smartest rollover option for your needs. Here are some important facts to consider when making a rollover after changing jobs.

Keep Your 401(k) With Your Former Employer

If you’re satisfied with the performance of your 401(k) under your former employer, you may choose to keep it with your old company, provided the account has at least $5,000 in it. It’s important to note that a 401(k) with less than $5,000 may automatically be deposited into an independent retirement account (IRA) in your name by the plan’s administrator, depending on the plan. If the account has less than $1,000, the plan’s administrator may send you a check for that amount.

While you won’t be permitted to make new contributions to the 401(k) if you keep it with your previous employer, your earnings will remain tax-deferred until you take a distribution. You’ll also preserve the ability to roll it over in the future.

When comparing your former company’s plan to what your new employer offers, lower fees and better investment options may also lead you to keep your 401(k) with your old company and forgo a rollover.

Roll It Into Your New Company’s 401(k) Plan

If permitted by your new company, rolling over your 401(k) from a previous job into your new plan will consolidate your accounts and streamline your retirement savings. In other words, it may make life easier for you. Instead of monitoring and maintaining multiple accounts, you can solely focus on the 401(k) offered by your new employer.

You may also choose to roll over your old 401(k) into a new one if the new plan offers better investment options and/or a more diversified set of assets that better matches your financial plans.

If you opt to roll over your existing 401(k), you’ll have two options to complete the process: a direct rollover or an indirect rollover. In a direct rollover, the administrator of your older account will make the payment directly to your new retirement plan. No taxes will be withheld from the money, which will continue to grow tax-deferred in the new account.

An indirect rollover — or 60-day rollover — will pay the 401(k) distribution directly to you, who will then be responsible for depositing the funds into the new account within 60 days. After that threshold, the rollover becomes a taxable event and may be subject to a 10% early withdrawal penalty.

While lower fees may compel you to keep your 401(k) with your former company, they may also be the reason to roll over your account into your new employer’s plan. You can compare the fees and expenses associated with both plans by locating the plans’ fee disclosure documents, which will list both asset-based fees (also known as investment fees) and plan administration costs.

Roll Your Money Into an IRA

Moving your money into an IRA is one 401(k) rollover option.

What if your new company doesn’t offer a 401(k) plan? Or perhaps you want more control over your investments and a wider array of asset options. If so, rolling your 401(k) into an IRA may suit your needs.

After opening an IRA with a bank or brokerage firm, you’ll use a direct rollover or 60-day rollover to move the money from your 401(k) into the IRA. By rolling your retirement savings into an IRA, you’ll assume control over your investments and may have a broader range of options.

While contributions to a 401(k) or traditional IRA are taxed when money is pulled out of the account, a Roth IRA allows your money to grow tax-free because the contributions are made after being taxed. It’s important to note that some 401(k) plans won’t allow you to roll over your money directly into a Roth IRA. If that’s the case, you can move the funds into a traditional IRA and then convert it to a Roth account, but a financial advisor can help you through this process.

Cash Out Your 401(k)

The final option for your existing 401(k) is simply cashing it out. Taking a lump sum payout may seem enticing, but most financial advisors would caution against it. If you’re under 55 years old, cashing out your 401(k) will likely trigger a 10% penalty on top of regular income taxes owed to the IRS. You should likely talk to a professional before making this decision.

Bottom Line

A financial advisor can better help you understand your 401(k) rollover options.

When changing jobs, you’ll need to decide what to do with your 401(k). Remember, you have four basic options: keeping it with your former employer, rolling it over into your new company’s 401(k) plan, rolling it over into an IRA and cashing it out. The decision you make will depend on a range of factors, including fees, your desire to control your account, your age and other considerations.

Tips for Rolling Over Your 401(k)

  • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • You can also use a 401(k) calculator to help you see how your funds can grow or how they are impacted based on what you choose to do with your money.

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