A 401(k) is a popular retirement savings plan offered by many employers, designed to help employees build a financial cushion for their post-work years. Contributions are made pre-tax, and many employers match a portion of these contributions, making it a powerful tool for long-term savings. However, what happens to your 401(k) when you leave your job?
You might wonder if transferring your 401(k) to your new employer is possible and what steps to take. This process is called a 401(k) rollover and it can help consolidate your retirement funds while keeping the tax benefits of the account.
In this article, we’ll cover how to transfer your 401(k) to a new job, the potential advantages and drawbacks, and rules you need to know.
“Can I transfer my 401(k) to my new job?”
Yes. Transferring your 401(k), an action referred to as a rollover, involves moving your retirement savings from your previous employer’s plan into your new employer’s plan or another retirement account. This process keeps your funds growing under tax-deferred status and consolidates your savings in one place.
When leaving a job, you have a few options:
- Rolling your 401(k) into your new employer’s plan
- Transferring it to an Individual Retirement Account (IRA)
- Leaving it with your old employer
- Cashing it out
Among these, rolling over to a new plan can simplify management, helping you keep track of your retirement investments in one place. The rollover process starts with contacting your old plan administrator to request the transfer.
Then, you have two choices: Direct or indirect rollover. “Do a direct rollover to avoid tax penalties,” says Dana Ronald, an economist with 40 years of experience in tax representation and founder of Tax Crisis Institute. “Direct rollovers ensure your funds move without tax withholding.” A direct rollover means your funds are transferred directly from your current 401(k) plan manager to your new account.
Conversely, with an indirect rollover, the funds are sent to you, and it’s up to you to deposit them into a new retirement plan within 60 days to avoid taxes and penalties, Ronald says.
What are the eligibility requirements of a 401(k) rollover?
To successfully roll over your 401(k) to a new employer’s plan, certain conditions must be met.
- Separation from your previous employer: Most plans require that you no longer work for the employer where the 401(k) is held.
- New employer must offer a retirement plan: You can’t transfer your 401(k) if your new employer doesn’t offer a retirement plan. In such cases, an IRA can be a good alternative.
- A new employer’s plan that accepts rollovers: Not all 401(k) plans allow rollovers from previous accounts, so confirm with your new employer before you initiate a transfer.
- Adherence to the 60-day rollover rule: If you receive funds directly, you must deposit them into a new qualifying retirement account within 60 days to avoid taxes and penalties.
Pros and cons of transferring your 401(k) to a new job
When deciding whether to transfer your 401k to a new job, it’s important to consider the advantages and disadvantages. “Consider the fees, range of investment choices, and your future plans,” Ronald says. “Some people leave their 401(k) with the old employer if the plan offers low costs and investment options that are not available in the new plan. Also, look into how much control you have over the assets and if the old plan requires mandatory withdrawals once you reach retirement age.”
Pros of transferring your 401(k)
- Simplified account management: Consolidating your retirement funds into one account simplifies tracking and reduces the complexity of managing multiple plans.
- Potential employer contributions: Employer matches from your new company can significantly boost your savings, making it an attractive reason to transfer your 401(k). “Determine if the plan of the new employer contains a matching payer contribution,” says Yosef Adde, an investor, financial advisor, and founder of real estate company I Buy LA. If they do, you’ll likely want to transfer your account.
- Optimized investment costs: Assess whether the new plan offers lower fees. If the new employer’s plan has more cost-effective investment options, it could help reduce the overall expense of managing your 401(k), making the transfer a beneficial move for your long-term savings.
Cons of transferring your 401(k)
- Fees and costs: Transferring your 401(k) may expose you to new administrative or investment fees. “Fees incurred on the new plan may differ from those of other plans, as well as from the historical administration and investment fees previously charged,” Adde says.
- Different/limited investment options: “Assess whether the new optimized cost plans have stronger diversity that is aligned with your objectives, or if it has fewer investment opportunities available,” Adde says.
How to transfer a 401(k) to new job
Rolling over your 401(k) to your new employer’s plan is a straightforward process, but there are a few steps to follow to ensure it goes smoothly.
- Contact your new employer’s HR or benefits department. Confirm that they accept 401(k) rollovers, and ask for specific instructions on how to proceed with the transfer.
- Get the required rollover forms and provide details of your previous 401(k) plan. Once you have the forms, you’ll be asked to provide information about your previous 401(k) plan, such as the account number and contact details for the plan administrator. You may also need to specify how you want your funds to be invested in your new employer’s plan.
- Consider whether you should transfer your 401(k) immediately or wait. It’s generally best to wait until your new employer’s plan is fully set up and ready to receive your rollover. Some plans may have a waiting period, or it may take time for the paperwork to be processed. Ask your HR department about any waiting periods or restrictions before you initiate the rollover.
What to expect during the process
The paperwork for rolling over your 401(k) will require verification of both your old and new accounts. You might need to provide official statements from your old plan. During this step, the administrator of your old plan will also verify your request and process the transfer.
Once the rollover is initiated, the process can take anywhere from a few days to several weeks. The exact timing depends on your old and new plan administrators, but expect to wait anywhere from seven to 60 days. Be patient and follow up if necessary.
There can be a few issues that cause delays in the process. For example, incorrect paperwork, missing information, or a delay in the funds transferring from the old plan to the new one. Always keep track of the status of your rollover, and don’t hesitate to contact the administrators if something seems off.
Alternatives to transferring your 401(k)
If you choose not to roll over your 401(k) to your new employer’s plan or in case your new employer doesn’t offer a 401(k) plan, there are a few other options available, each with its benefits and drawbacks.
Leaving the 401(k) with your previous employer
You may choose to leave your 401(k) where it is if your old employer’s plan allows it.
Advantages:
- No immediate action required: You don’t have to worry about initiating a rollover, and your investments will continue to grow tax-deferred.
- Possibly lower fees: If your previous employer's plan has lower fees, leaving it there may be beneficial.
Drawbacks:
- Limited access and control: You’ll still be subject to the rules and investment options of your old employer’s plan, which may not align with your current retirement goals.
- Difficulty managing multiple accounts: If you’ve switched jobs multiple times, keeping track of several 401(k) accounts can become tricky.
Rolling over your 401(k) into an IRA
“A rollover to an IRA is a solid alternative,” says Ronald. “It gives you control over the funds, with flexible investment options.”
Advantages:
- Greater investment flexibility: IRAs typically offer a wider range of investment options compared to most employer-sponsored plans.
- Tax advantages: Like 401(k)s, IRAs allow your investments to grow tax-deferred until withdrawal.
- Control over funds: As the account holder, you have greater control over how your funds are invested.
Drawbacks:
- Fewer legal protections: IRAs don't have the same legal protections as employer-sponsored plans, particularly in bankruptcy scenarios.
- Potential fees: Depending on the type of IRA and provider, you could face higher management or trading fees.
- Lack of loan options: IRAs don’t allow for loans, unlike some employer 401(k) plans.
Cashing out your 401(k)
Cashing out your 401(k) is usually the least advisable option, as it can come with significant penalties. “Cashing out should be done only in extreme cases,” Adde says.
Advantages:
- Immediate access to cash: If you face an urgent financial need, cashing out provides immediate access to funds.
- Simplicity: The process of cashing out can be straightforward compared to other options like rolling over into an IRA or new employer’s plan.
Drawbacks:
- Taxes and penalties: If you're under the age of 59½, you will likely face a 10% early withdrawal penalty, in addition to owing income taxes on the full amount.
- Loss of future growth: Cashing out your 401(k) means you forfeit future tax-deferred growth on those funds, significantly impacting your retirement savings.
- Potential for a smaller retirement fund: When factoring in penalties and taxes, the amount you receive after cashing out may be much lower than you anticipated.
Combining multiple 401(k)s
Many people change jobs throughout their careers and accumulate multiple 401(k)s. While it’s possible to leave these accounts where they are, consolidating them can make managing your retirement savings easier.
“This will make the task of handling multiple accounts simple, incur fewer charges, and allow enlarging the view of anticipating the retirement plans,” Adde says. “Many people will find it beneficial especially when older plans have poor investment alternatives and high charges.”
Advantages:
- Simplified management: Combining multiple 401(k)s into one account makes it easier to track and manage your retirement savings.
- Reduced fees: By consolidating, you may be able to reduce account maintenance or administrative fees that are common with multiple accounts.
- Easier to monitor performance: With fewer accounts, you can more easily track the performance of your investments and make adjustments as needed.
Drawbacks:
- Possible fees for rolling over: Your current plan might charge fees for rolling over your funds into another plan, so you’ll want to check the terms before proceeding.
- Loss of plan-specific benefits: Some older 401(k) plans may have specific benefits, such as access to unique investment opportunities, that you might lose when consolidating.
- Potential tax implications: If you’re moving between different types of accounts, such as from a traditional 401(k) to a Roth 401(k), you may face tax consequences.
Keep track of your retirement funds
Transferring your 401(k) to a new employer can be beneficial if the new plan offers lower fees, better investment options, or stronger legal protections, such as those provided by ERISA. By consolidating your retirement funds, you can simplify your financial life, reducing the number of accounts to manage.
However, consider potential drawbacks, such as high fees in the new plan or limited investment options. Ultimately, the decision depends on how the new plan compares to your old one in terms of costs, investment choices, and other significant factors to your retirement strategy.
Before making the transfer, it’s wise to consult with a financial or tax advisor to ensure the move aligns with your long-term goals. In some cases, leaving the 401(k) with your old employer or rolling it over into an IRA could be better options, especially if your current employer’s plan isn’t ideal or if the transfer would result in unnecessary costs. By weighing these considerations carefully, you can make the best decision for your retirement savings.
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FAQs
How long does a 401(k) rollover take?
The rollover process typically takes between two to four weeks, but it can vary depending on the plan administrators and whether it's a direct or indirect rollover. In some cases, it may take longer if there are any paperwork issues or delays in processing.
Can I cash out my 401(k)?
Yes, you can cash out your 401(k) if you leave your job, but experts typically advise against it unless absolutely necessary. Cashing out before age 59½ typically incurs a 10% early withdrawal penalty, on top of regular income taxes on the amount withdrawn.
Can a 401(k) be transferred to another job?
Yes, you can transfer (roll over) your 401(k) to a new employer’s retirement plan if they offer one. If your new employer doesn’t have a 401(k) plan, other options like rolling over your 401(k) into an IRA may be available.
Is there a fee to roll over a 401(k) to another company?
Some 401(k) plans may charge fees for processing rollovers, though many plans don’t. It's important to review the terms of both your old and new plan to determine if there are any fees associated with the rollover.
What happens if I don’t roll over my 401(k) from a previous employer?
If you don't roll over your 401(k), you can leave the funds with your previous employer’s plan (if allowed), or you might have to withdraw the money, which could lead to taxes and penalties. Alternatively, you may choose to roll it over into an IRA to keep the tax advantages.