How to Move Your 401(k) to a New Job

When you change jobs, a common financial consideration involves your old 401(k) plan. Understanding the choices available for these retirement savings is important to avoid potential tax issues and to keep your long-term financial goals on track. Deciding what to do with your former employer’s 401(k) is a significant step in managing your retirement portfolio. This decision requires careful consideration of future financial needs and the implications of each option.

Options for Your Old 401(k)

Upon leaving an employer, you generally have four options for the funds in your old 401(k) plan. You can leave the money within your former employer’s plan, provided plan rules permit it. This is often allowed if your account balance exceeds $5,000. However, you will no longer be able to make new contributions.

Another common choice is to roll over the funds into your new employer’s 401(k) plan. This can simplify your retirement savings by consolidating accounts in one place, though it depends on whether your new plan accepts such rollovers. Consolidating can make it easier to track your investments and progress toward retirement goals.

You can also roll over the funds into an Individual Retirement Account (IRA). This option offers a wider range of investment choices and potentially lower fees compared to some employer-sponsored plans. An IRA rollover provides greater control over your investment decisions and can be established with a financial institution of your choosing.

The final option is to cash out your 401(k) balance. This involves taking a direct distribution of the funds. Cashing out usually incurs significant tax consequences and penalties, making it the least advisable choice for preserving your retirement savings.

Preparing for a 401(k) Rollover

Before initiating a 401(k) rollover, gathering specific information is important. You will need details from your old 401(k) plan administrator, such as your account number, their contact information for the distribution department, and any required distribution or rollover forms. It is also important to understand the plan’s specific rules regarding rollovers.

Collect necessary information from your new 401(k) plan administrator or IRA custodian. This includes account setup requirements, instructions for incoming rollovers, and the receiving institution’s details, such as their name and address. Knowing what types of assets you hold (pre-tax or Roth) will help determine the appropriate type of IRA to open, such as a traditional or Roth IRA.

A decision during preparation involves choosing between a direct rollover and an indirect rollover. In a direct rollover, funds transfer directly from your old plan to the new plan or IRA custodian without passing through your hands. This method avoids immediate tax withholding and potential penalties.

Conversely, an indirect rollover means you personally receive the funds, typically via a check. You are then responsible for depositing them into a new qualified retirement account. Your old plan is required to withhold 20% of the distribution for federal income tax. You have 60 days from receiving the funds to deposit the full amount, including the withheld portion, into the new account to avoid it being considered a taxable distribution and subject to penalties.

Executing a 401(k) Rollover

Begin by contacting your old 401(k) plan administrator to initiate the transfer. They will provide the specific forms required to request a distribution or rollover.

Complete these forms, ensuring all requested details about your new account are accurate. The forms will require information such as the new account number, the name of the receiving financial institution, and how the funds should be sent, whether by direct wire transfer or check. For a direct rollover, the check will be issued directly to the new plan administrator or IRA custodian, often with your name noted for identification.

After submitting the forms, the funds will be transferred. If a check is issued, it might be sent directly to the new institution or mailed to you but still made payable to the new institution. If you receive a check made out to you for an indirect rollover, deposit the full amount into the new retirement account within the 60-day deadline.

It is important to track the transfer to ensure its successful completion. Confirm with your new plan administrator or IRA custodian that the funds have been received and properly allocated to your account.

Tax Implications of 401(k) Decisions

The decision regarding your old 401(k) carries tax implications. Cashing out your 401(k) results in the entire distribution being taxed as ordinary income in the year you receive it. If you are under age 59½, an early withdrawal penalty of 10% applies to the withdrawn amount, with some exceptions. This option also triggers a mandatory 20% federal income tax withholding.

Direct rollovers, where funds move directly between qualified plans or to an IRA, are non-taxable events. This means no immediate income tax or penalties are triggered, preserving the tax-deferred status of your retirement savings.

For indirect rollovers, the 20% mandatory federal income tax withholding applies, as the funds are paid directly to you. To avoid the distribution being fully taxed and incurring the 10% early withdrawal penalty (if applicable), you must deposit the entire original amount, including the withheld 20%, into a new qualified plan or IRA within 60 days. This often requires using personal funds to make up the 20% difference, which is then recovered as a tax credit when you file your income taxes. The distribution and subsequent rollover will be reported on IRS Form 1099-R.

Rolling pre-tax 401(k) funds into a Roth IRA is a taxable event, known as a Roth conversion. The entire amount converted will be added to your taxable income for the year of the conversion, as Roth accounts are funded with after-tax dollars. Conversely, rolling pre-tax 401(k) funds into a traditional IRA is a non-taxable event, as both are tax-deferred accounts.