How to Roll Over Your 401(k) to a New Job

When changing jobs, managing your previous employer’s 401(k) plan is a common financial consideration. A 401(k) rollover involves moving funds from your old employer-sponsored retirement plan into another qualified retirement account. This process allows your retirement savings to continue growing on a tax-deferred basis, maintaining their protected status. Individuals often pursue rollovers to consolidate their retirement assets, simplify financial management, or gain access to different investment options.

Understanding Your Rollover Options

Upon leaving a job, you have several options for your 401(k) funds. One choice is to leave the money in your former employer’s plan, if the plan administrator permits this. While this requires no immediate action, it might lead to limited investment choices, potentially higher fees, and the challenge of tracking multiple accounts.

Another option is to cash out your 401(k) by taking a direct distribution. This action typically results in significant financial consequences, including immediate taxation of the withdrawn amount as ordinary income. If you are under age 59½, you will also incur an additional 10% early withdrawal penalty from the Internal Revenue Service. This approach generally reduces your long-term retirement savings substantially due to taxes and penalties, making it an option usually not recommended unless facing dire financial emergencies.

Rolling over your funds to your new employer’s 401(k) plan is a common and often advantageous choice. This consolidates your retirement savings into a single account, simplifying management and potentially offering lower fees or better investment choices. However, this option depends on whether your new employer’s plan accepts rollovers from outside accounts.

Alternatively, you can roll over your 401(k) into an Individual Retirement Account. This offers broader investment choices compared to many employer-sponsored plans and provides greater control over your retirement funds. If you roll pre-tax 401(k) funds into a Traditional IRA, the funds continue to grow tax-deferred, and you will pay taxes only upon withdrawal in retirement. Should you choose to roll over pre-tax 401(k) funds into a Roth IRA, the conversion is a taxable event, meaning you will pay income taxes on the converted amount in the year of the rollover. However, qualified withdrawals from a Roth IRA in retirement are entirely tax-free, including earnings, provided certain conditions are met, such as having the account for at least five years and being age 59½ or older.

Preparing for the Transfer

Before initiating a 401(k) rollover, gathering necessary information is important. You will need your old 401(k) account number, contact details for the plan administrator, and your current account balance. Understanding the type of funds you hold (pre-tax or Roth) and any specific distribution forms required by your former plan is also helpful.

Contacting your previous plan administrator is important to obtain the required distribution forms and understand their specific rollover procedures. This communication helps ensure you comply with their requirements and avoid delays.

Choose between a direct rollover and an indirect rollover. In a direct rollover, funds are transferred directly from your old plan to your new retirement account, either by check made payable to the new institution or via electronic transfer. This method is generally preferred as it avoids tax withholding and the complexities of the 60-day rule. An indirect rollover, in contrast, involves the funds being sent to you directly, and you are then responsible for depositing the full amount into a new qualified account within 60 days.

When considering an indirect rollover, your old plan is typically required to withhold 20% of the taxable distribution for federal income taxes. To complete a tax-free rollover, you must deposit the full original amount, including the 20% withheld, into the new account within 60 days. If you fail to deposit the entire amount, the portion not rolled over becomes a taxable distribution, and if you are under age 59½, it may also incur the 10% early withdrawal penalty.

Before the rollover, select your receiving account. If rolling into an IRA, open a Traditional or Roth IRA account with a financial institution. If transferring to a new employer’s 401(k), contact their plan administrator to understand their specific requirements for accepting incoming rollovers.

Completing the Rollover Process

Initiating a direct rollover involves contacting your former 401(k) plan administrator and instructing them to transfer to your chosen receiving institution. You will need to provide the new account’s details, including the institution’s name and account information. The funds are typically sent directly to the new institution, often via a check made payable to the new plan or IRA custodian for your benefit, or through an electronic transfer. This method ensures the funds never pass through your personal possession, preventing mandatory tax withholding and avoiding 60-day rule risks.

While direct rollovers are generally recommended, an indirect rollover involves receiving a distribution check directly. If you choose this method, remember the 60-day deposit rule and the 20% mandatory tax withholding, as discussed previously.

After the rollover is initiated, confirm the transfer’s completion with both your old plan administrator and the new account custodian. Monitor your new account statements to ensure the funds have been received and invested as intended. If there are any discrepancies or delays, contact both institutions promptly for clarification. For tax reporting, your former 401(k) plan will issue Form 1099-R, detailing the distribution, while the new plan or IRA custodian will issue Form 5498, confirming the rollover.