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.

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401(k) rollover into an IRA

A direct 401(k) rollover into an IRA is often the preferred choice for most people.

Possible benefits of rolling over your 401(k) to an IRA:

  • 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
  • Possibly lower fees/fund expenses: in addition to the costs of the funds themselves, 401(k) participants usually pay the administration costs of the plan. 401(k) investment options may be limited, leaving few alternatives to high-cost funds.
  • 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.
  • 401(k) vs IRA rules for penalty-free early withdrawals: IRAs permit certain withdrawals for qualified education expenses, first-time homebuyers, and health insurance premiums paid while unemployed. However, 401(k)s can permit withdrawals beginning at age 55 when the employee has separated from service.
  • Coordinated investment management with the help of a financial advisor
  • Terminated participants can’t contribute, but any taxpayer with earned income can contribute to an IRA

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

Considerations before doing a 401(k) rollover:

  • Consider whether the plan expenses are offset by the employer and if there’s a brokerage window to invest outside of the plan options
  • Consider what, if any, other services the plan extends to terminated participants
  • Evaluate costs at the new financial institution including advisory, custodial fees, and fund expenses on the new asset allocation
  • Creditor protection for assets in an IRA may be lower than a qualified plan
  • Do you have company stock in your 401(k)? If so, be aware of the potential tax benefits of net unrealized appreciation 

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.

Possible benefits:

  • After paying tax in the year of conversion, the account will grow tax-deferred like an IRA or 401(k), but after reaching age 59 ½ and if at least 5 years has passed since your Roth IRA was opened, the money can be withdrawn tax-free
  • Roth IRAs have no required minimum distributions
  • Consolidate your accounts under one custodian
  • Anyone can do a Roth conversion – there are no income limits
  • You can convert all or part of your 401(k)
  • Like an IRA rollover, you may benefit from account consolidation, lower plan fees and/or investment expenses, expanded fund offerings
  • Coordinated investment management with the help of a financial advisor
  • Terminated participants can’t contribute, but Roth IRA contributions are permitted based on income

Considerations:

  • 401(k) vs IRA rules for penalty-free early withdrawals: IRAs permit certain withdrawals for qualified education expenses, first-time homebuyers, and health insurance premiums paid while unemployed. However, 401(k)s can permit withdrawals beginning at age 55 when the employee has separated from service.
  • The conversion is included in your taxable income for the year, which could put you in a higher tax bracket. A Roth conversion generally isn’t a good idea if you need to take money from the retirement account to pay the tax. Further, if you are in a much higher tax bracket now than you expect to be in later, this strategy may not be worthwhile.
  • Creditor protection for assets in an IRA may not be as robust as a qualified plan
  • Do you have company stock in your 401(k)? If so, be aware of the potential tax benefits of net unrealized appreciation 
  • Consider whether the plan expenses are offset by the employer and if there’s a brokerage window to invest outside of the plan options
  • Consider what, if any, other services the plan extends to terminated participants
  • Evaluate costs at the new financial institution including advisory and custodial fees

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 may be better ways to manage your retirement savings.

Possible benefits:

  • Nothing changes, you are familiar with the investment options, costs, plan services, etc.
  • Enhanced creditor protection vs an IRA
  • No action is required; you can decide what to do with the money later
  • Maintain access to participant services offered to former employees, if any
  • 401(k)s can permit withdrawals beginning at age 55 when the employee has separated from service
  • Preserve NUA tax treatment on company stock

Considerations:

  • Can be harder to view/manage your accounts and understand where you stand financially; easier to forget about the account
  • Remain subject to existing plan fees/expenses including fund expenses, possible constraints on investment options
  • Multiple logins
  • Cannot contribute to an old retirement plan
  • Penalty-free withdrawal options aren’t the same as an IRA
  • Professional management and advisory services may not be an option

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.

Possible benefits:

  • 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.
  • Services: as a plan participant you may have access to services in the plan, such as investor tools and education. Keep in mind that as an active participant, you would likely have access to these resources regardless of whether you roll money from your old plan into the new one
  • 401(k) loans: consider whether the plan offers 401(k) plan loans and whether you may need to avail yourself of this provision
  • If you choose to work past required minimum distribution (RMD) age, you may be able to avoid taking RMDs until you fully retire
  • Enhanced creditor protection

Considerations:

  • Your investment options may still be limited depending on the plan; consider the fund lineup before doing a transfer
  • Consider plan administration fees and expenses, including cost-sharing with your employer (if any). Also consider the expense ratios and fees for the investments in the plan
  • 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 or retire
  • Do you have company stock in your 401(k)? If so, be aware of the potential tax benefits of NUA
  • Penalty-free withdrawal options aren’t the same as an IRA
  • Professional management and advisory services may not be an option

 

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
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