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

When transitioning between employers, individuals face decisions regarding their existing 401(k) retirement savings. Making an informed choice about these funds is important for managing long-term financial health. The path chosen for a 401(k) from a previous job can influence its continued growth and accessibility. Understanding the available options is a first step in navigating this employment change.

Your 401(k) Options

Upon separating from an employer, individuals have four primary choices for their 401(k) funds.
One option involves leaving the money within the former employer’s plan. The account remains with the previous plan administrator, and investments continue to grow on a tax-deferred basis, though new contributions cannot be made.

Another common choice is to roll over the funds into a new employer’s 401(k) plan. This transfers the retirement savings to the qualified plan offered by the current employer, which can simplify financial management by keeping assets in a single account.

A third option is to roll over the 401(k) into an Individual Retirement Account (IRA). This involves transferring the funds to a personal IRA, which can offer a broader selection of investment opportunities compared to many employer-sponsored plans. An IRA rollover also provides direct control over the account.

Finally, an individual may choose to take a lump-sum distribution, cashing out the 401(k) funds. This means directly withdrawing the money, a choice with significant tax implications and potential penalties.

Preparing for a Rollover

Preparing for a 401(k) rollover requires gathering specific information from both the old and new plan administrators. Individuals should obtain their old 401(k) account number, the plan name, and contact details for the distributions department. If rolling into a new employer’s 401(k) or an IRA, the corresponding account details and custodian information will also be necessary.

A crucial decision involves selecting between a “direct rollover” and an “indirect rollover.” In a direct rollover, funds transfer directly from the old plan to the new plan administrator or IRA custodian. This method avoids immediate tax implications and withholding.

Conversely, an indirect rollover means funds are first distributed to the account holder, who then deposits the money into the new retirement account. The former plan administrator issues a check made out to the individual. This option involves mandatory federal tax withholding of 20% from the distribution amount.

Required documentation to initiate a rollover includes specific forms from the old plan administrator. These forms can be obtained through the plan’s website or by contacting their service department. Accurate completion of these forms involves providing the account information for both the originating and receiving accounts.

Executing a Rollover

Executing a 401(k) rollover begins by contacting the former 401(k) plan administrator to request the distribution. This request involves submitting completed rollover forms, which can be done via mail, fax, or an online portal. The plan administrator will then process the request based on the chosen rollover type.

For a direct rollover, funds are sent electronically or via check payable directly to the new 401(k) plan or IRA custodian. This process ensures money moves directly between financial institutions, avoiding immediate tax withholding.

In an indirect rollover, the plan administrator issues a check made out to the individual. This check will have 20% of the distribution amount withheld for federal income taxes. The individual then has 60 calendar days from the date of receipt to deposit the full gross distribution amount into the new qualified retirement account. To avoid taxes and penalties on the withheld amount, the individual must deposit funds from other sources to cover the 20% initially withheld.

After funds are sent, the individual should notify the new 401(k) plan administrator or IRA custodian about the incoming rollover. Track the transfer process and confirm the receipt of funds by the new institution, retaining all documentation for tax records.

Other Post-Employment 401(k) Choices

Individuals have other options for their 401(k) when leaving a job, including leaving the money in the old plan or cashing it out.

If permitted by the former plan, leaving funds in the old 401(k) means no active steps are required. The account remains with the previous employer’s plan administrator. While funds continue to grow tax-deferred, new contributions cannot be made.

Administrative aspects, such as receiving statements and accessing online account management, will continue through the former plan’s provider. Some plans may impose fees or have investment options that might differ from a new plan or IRA. If the account balance is below certain thresholds, typically $5,000 or $7,000, the former employer may automatically roll over the funds into an IRA or cash out the account.

Cashing out a 401(k) involves requesting a direct distribution of the funds. This action can be initiated by contacting the old 401(k) plan administrator and completing their specific withdrawal forms. When a lump-sum distribution is paid directly to the individual, mandatory federal income tax withholding of 20% applies to the taxable portion. This withholding is reported on Form 1099-R.

If the individual is under age 59½ at the time of distribution, the withdrawn amount is subject to an additional 10% early withdrawal penalty. This penalty applies in addition to ordinary income taxes on the distribution. State income taxes may also apply.