Can You Transfer Your 401k to Another Job?
Moving jobs? Learn how to strategically manage your previous 401k, ensuring its continued growth and alignment with your long-term financial goals.
When changing jobs, a common question arises regarding the future of your 401(k) retirement savings plan. A 401(k) is an employer-sponsored retirement account that allows employees to save and invest a portion of their paycheck before taxes are taken out, with investments growing tax-deferred until withdrawal in retirement. Individuals have several distinct options for handling their 401(k) from a former employer.
Available Paths for Your Previous 401(k)
Individuals leaving a job generally have four main options for their accumulated 401(k) funds. One choice is to leave your funds with the former employer’s plan. This option is available if your account balance exceeds a certain minimum, typically $5,000, though some plans may allow balances as low as $1,000 or $0 to remain. Your money continues to be invested within the old plan, managed by the former employer’s chosen administrator, and remains subject to the plan’s specific investment options and rules.
Another common path involves rolling over your 401(k) into an Individual Retirement Arrangement (IRA). This transfers your retirement savings into a personal account that you control, offering a broader range of investment choices and potentially lower fees compared to some employer-sponsored plans. You can choose to roll funds into a Traditional IRA, maintaining their tax-deferred status, or into a Roth IRA, which would involve paying taxes on the rollover amount now in exchange for tax-free withdrawals in retirement.
A third option is to roll over your previous 401(k) into your new employer’s 401(k) plan. This can simplify your retirement savings by consolidating multiple accounts into one, making it easier to track your overall progress. However, this option is only possible if your new employer’s plan accepts incoming rollovers from outside accounts, and you would then be subject to the new plan’s specific investment offerings and administrative policies.
Finally, you can choose to take a cash distribution of your 401(k) funds. This means directly withdrawing the money from your account. While this option provides immediate access to your funds, it incurs significant tax consequences and potential penalties, which can substantially reduce the amount you ultimately receive.
Navigating the Rollover Process
Executing a 401(k) rollover requires gathering all necessary information and documentation. This includes your old 401(k) account number, contact information for the former plan administrator, and details for your new account. You will also need specific forms, such as a 401(k) distribution request and rollover instruction form, from your former plan administrator or new account provider. These forms must be completed accurately to facilitate a smooth transfer.
Once information and forms are completed, you can proceed with a direct rollover. In a direct rollover, funds transfer directly from your old 401(k) plan administrator to your new IRA or new employer’s 401(k) provider. This method avoids immediate tax withholding or penalties, as funds never pass through your personal possession. Submit the completed rollover forms to your former plan administrator, who initiates the transfer.
Alternatively, an indirect rollover carries more risks and complexities. With this method, a check for your 401(k) balance is issued directly to you, often with a mandatory 20% federal income tax withholding. You must deposit the full distribution, including the withheld 20%, into a new qualified retirement account within 60 days of receiving the funds. Failure to deposit the full amount within this 60-day window means the unrolled portion, including the 20% withheld, will be considered a taxable distribution and may be subject to additional penalties.
To complete an indirect rollover successfully, you must use personal funds to cover the 20% withheld by the plan administrator when depositing the check. This ensures the entire original balance is rolled over, avoiding a taxable event. You will then recover the 20% withholding when you file your income taxes for that year, as it is treated as an overpayment of taxes.
Tax and Financial Implications of Your Choice
Your choice for your previous 401(k) has tax and financial implications. Leaving funds with your former employer’s plan allows for continued tax-deferred growth, with taxes deferred until withdrawal. However, this option may come with limited investment choices compared to an IRA and could involve administrative fees charged by the former plan.
Rolling over funds into an Individual Retirement Arrangement (IRA) also maintains tax-deferred growth if you choose a Traditional IRA. This path often provides greater investment flexibility, allowing access to a wider array of investments. While IRAs can have lower annual fees, converting a Traditional 401(k) to a Roth IRA makes the converted amount taxable income in the year of conversion.
Consolidating funds by rolling them into your new employer’s 401(k) plan also allows for continued tax-deferred growth and simplifies account management. Investment options and any associated fees are determined by the new employer’s plan structure. This choice aligns your retirement savings with your current employment benefits.
Taking a cash distribution typically results in significant tax and financial penalties. The entire amount withdrawn is taxable income in the year of distribution. If you are under age 59½, the distribution is usually subject to an additional 10% early withdrawal penalty, as outlined in Internal Revenue Code Section 72. Exceptions to this penalty include separation from service at or after age 55, disability, or distributions for certain unreimbursed medical expenses. Some plans may also impose surrender charges or other fees.