How to Move Your 401k From an Old Job

When individuals change jobs, they often face decisions about their 401(k) accounts. Managing these retirement savings effectively after leaving an employer is important for continued growth and avoiding potential penalties. Understanding the available options and processes for moving these funds helps ensure a smooth transition and maintains long-term retirement savings.

Your Options for an Old 401k

Upon leaving a job, there are generally four primary choices for managing a previous employer’s 401(k) account. Each option has distinct implications for accessibility, investment choices, and tax treatment.

One option is to leave the funds within the former employer’s 401(k) plan. Many plans permit this, especially if the account balance exceeds a certain threshold. While this requires no immediate action and allows the money to remain tax-deferred, it typically means no new contributions can be made, and investment options may be limited. If the balance is small, the former employer might automatically cash out the account or roll it into an IRA.

A common choice is rolling over the 401(k) into a new employer’s 401(k) plan. This can simplify retirement savings by consolidating accounts, making them easier to monitor. Not all new employer plans accept rollovers, so confirm eligibility. If accepted, this option allows for continued tax-deferred growth without immediate tax penalties.

Another option is rolling over the funds into an Individual Retirement Account (IRA). This can provide a broader range of investment choices and potentially lower fees compared to many employer-sponsored plans. For pre-tax 401(k) funds, a rollover to a Traditional IRA allows continued tax-deferred growth. If rolling over a Roth 401(k), the funds can go into a Roth IRA tax-free, maintaining the benefit of tax-free withdrawals in retirement. Converting a Traditional 401(k) to a Roth IRA is possible, but the pre-tax amount converted becomes taxable income in the year of conversion.

The least recommended option is cashing out the 401(k) account. This involves taking a direct distribution of the funds. Unless specific exceptions apply, withdrawals before age 59½ are typically subject to ordinary income tax and an additional 10% federal early withdrawal penalty. This action also forfeits future tax-deferred growth, severely impacting long-term retirement savings.

Key Decisions Before Moving Funds

Before initiating any transfer, understanding the mechanics and gathering necessary information is important to avoid potential tax issues and ensure a smooth process. The method of transfer, required documentation, and associated costs are important considerations.

One important distinction involves choosing between a direct rollover and an indirect rollover. In a direct rollover, funds are transferred directly from the old 401(k) administrator to the new retirement account custodian. This method is generally preferred because no taxes are withheld, and the individual never takes possession of the funds, thus avoiding the 60-day rule and mandatory 20% tax withholding.

Conversely, an indirect rollover involves the 401(k) administrator sending the funds to the individual, typically via a check. If this method is chosen, the plan administrator is legally required to withhold 20% of the distribution for federal income taxes. The individual then has 60 calendar days from receiving the funds to deposit the entire amount, including the 20% withheld, into another qualified retirement account to avoid the distribution being treated as taxable income and potentially incurring the 10% early withdrawal penalty. If the full amount is redeposited, the 20% withheld by the old plan is typically recovered as a tax credit when filing the annual tax return.

To facilitate any rollover, individuals will need to gather specific account information. This includes the account number and contact details for the old 401(k) plan administrator. For the receiving account, whether a new employer’s 401(k) or an IRA, the new custodian will provide their specific account details, such as the receiving account number and any necessary routing or wire transfer instructions. Confirm the type of funds in the old 401(k)—whether pre-tax or Roth—to ensure they are rolled into the appropriate type of receiving account (Traditional IRA for pre-tax, Roth IRA for Roth).

Understanding potential fees is another important aspect. While there is usually no direct transfer fee for the rollover itself, new accounts may have different fee structures. These can include account maintenance fees, administrative fees, and investment-specific fees. Comparing the fee schedules of the old plan with potential new accounts can reveal opportunities for cost savings.

Finally, evaluating investment options is an important decision point. Different retirement accounts offer varying investment menus. A 401(k) plan’s investment choices are typically limited to a selection curated by the employer, while an IRA often provides a much broader range of investment vehicles, including individual stocks, bonds, and exchange-traded funds. Assessing whether the investment options in the new account align with personal financial goals and risk tolerance is an important part of the decision-making process.

Steps to Initiate a Rollover

Once the rollover destination is decided and information assembled, the transfer process can begin. This involves coordinating between the old plan administrator and the new account custodian.

The initial step is to contact the administrator of the old 401(k) plan. This can often be done by phone, using the number found on old account statements. Inform them of your intent to roll over the funds and request the necessary distribution forms. Some plan administrators may have specific requirements or waiting periods after employment termination before a distribution can be processed.

Upon receiving the forms, carefully complete them. These forms will require details of the receiving account, such as the name of the new custodian, the account number, and how the funds should be transferred. Ensure all information is accurate to prevent delays or complications. Once completed, submit the forms according to the old administrator’s instructions, which may include mail, fax, or an online portal.

Simultaneously, coordinate with the new custodian or administrator where the funds will be received. They may require specific forms to accept the incoming rollover. Provide them with any information requested about the incoming funds, such as the amount and the originating institution. For direct rollovers, the new custodian may provide specific instructions for the old plan administrator to ensure the check is properly made out to the receiving institution.

After submission, track the transfer’s progress. Rollovers can take anywhere from a few days to several weeks to process. Regularly follow up with both the old plan administrator and the new custodian to ensure the funds are moving as expected. This proactive approach helps identify and resolve any potential issues promptly.

Once the transfer is complete, confirm that the funds have been successfully deposited into the new account. This can be verified by checking the new account statement. Retain all documentation related to the rollover, including correspondence, forms, and confirmation statements, for personal records and tax purposes. This documentation serves as proof of the tax-free transfer and may be useful for future tax inquiries.