401(k) rollover options when you change jobs

If you’ve switched jobs and haven’t taken your old 401(k) with you, consider your rollover options.

There are 4 options for your old 401(k) when you change jobs:

  1. 401(k) rollover into an IRA
  2. Convert your 401(k) into a Roth IRA
  3. Leave your 401(k) in the old plan
  4. Transfer your 401(k) to your new job

What should you do with your old 401(k) when you change jobs?

You will generally have 4 rollover options when you change jobs. While considering a 401(k) rollover, it’s also a good time to tackle some other job transition money moves.

Wealth and Asset Management near me

401(k) rollover into an IRA

A direct 401(k) rollover into an IRA is the best options for most people.

Here are some benefits of rolling over your 401(k):

  • Fewer logins: consolidate your accounts under one custodian. Easier to manage (harder to ignore!)
  • More investment options: with an IRA, you’re not limited to the funds in your 401(k) plan anymore. This typically means better investment choices and lower costs.
  • Lower fees: In addition to the costs of the funds themselves, 401(k) participants usually pay the administration costs of the plan. Why pay for something you’re not really using if there’s a better option?
  • Continue tax-deferred growth: with a direct rollover to an IRA, you won’t owe any taxes when rolling over your 401(k). To avoid any mistakes, make sure to have the rollover check made payable to the new financial institution where you have your IRA for your benefit. The easiest way is to work with a financial advisor: we help clients with all the paperwork!
  • No limits on direct rollovers: as long as you do a custodian to custodian direct rollover (so you don’t take the funds personally) you can do multiple rollovers in a year if you change jobs really frequently. Or just have a bunch of old 401(k)s.

How to roll over a 401(k) to an IRA in 5 steps

Convert your 401(k) into a Roth IRA

A Roth conversion always sounds like a good idea, until people realize they have to pay tax on the entire amount. If you’re a high-earner, it may not make sense to convert to a Roth as your tax bracket could be lower in retirement.

What’s a 401(k) to Roth IRA conversion?

  • Your 401(k) is included in your taxable income for the year, which could put you in a higher tax bracket
  • 401(k) funds are invested in a Roth IRA. The account will grow tax-deferred like an IRA or 401(k). But, in retirement, funds can be taken out tax-free!
  • Roth IRAs have no required minimum distributions
  • Anyone can do one Roth conversion per year – there are no income limits
  • You can convert all or part of your 401(k)
  • Like an IRA rollover, you can expand your investment options, enjoy lower fees, have fewer logins, and continue tax-deferred growth

Should you leave your 401(k) at your old job?

Leaving your 401(k) behind isn’t the best long-term plan. If you want to leave it at your old job, assuming your account is $5,000 or more, you probably can. But there are better ways to manage your retirement savings.

Benefits: nothing changes.

Downside: nothing changes, harder to view/manage your accounts, easy to forget about it.

Transfer your 401(k) to your new job

Transferring your 401(k) to your new job is like a 401(k) to 401(k) rollover. Depending on the set up of your new plan, it’s probably a better option than leaving it behind but might not be as beneficial as rolling your 401(k) to an IRA. Check the plan documents of your new employer’s 401(k) to confirm the plan accepts incoming rollovers.

Pros and cons of transferring your 401(k) to your new 401(k):

  • Consolidate: this makes it easier to manage and invest consistently. You can’t forget about your old retirement plan because you took it with you.
  • Your investment options may be limited or worse than your old plan
  • Consider costs: rolling your 401(k) into your new 401(k) means you could pay higher fees. Plan fees could be spread by participant assets and trading costs will also apply. If you only have access to high-cost mutual funds and limited ETFs, this will also add to your expenses. This reduces your returns.
  • Final: you can’t roll the money back once you roll it in. Your assets will have to stay in the plan until you switch jobs again

How long do you have to complete a 401(k) rollover?

If you have $5,000 or more invested in your old 401(k), you can’t get kicked out of the plan. Unless the 401(k) plan itself terminates, you can stay invested in the plan. While you may have as long as you want to roll your 401(k) over, don’t wait too long. Out of sight, out of mind!

Infographic: Benefits of Rolling Over an Old 401(k)

Managing Your Finances During a Job ChangeGuide to managing your money and benefits during a transition
Sign Up for Weekly Investing Insights