Why Rollover Your 401k to a New Employer?

A 401(k) rollover involves moving funds from one tax-advantaged retirement account to another. This process typically occurs when individuals experience a significant life event, such as changing jobs or entering retirement. Deciding what to do with accumulated retirement savings from a former employer’s 401(k) plan is a common financial consideration. Navigating these options carefully helps maintain the tax-deferred status of retirement funds. This article explores choices for your previous employer’s 401(k), focusing on rolling funds into a new employer’s plan.

Options for Your Former Employer’s 401(k)

Upon leaving an employer, individuals face several choices regarding their 401(k) funds. One option is to leave the money within the former employer’s plan, provided the plan administrator allows it. While the funds continue to grow on a tax-deferred basis, you will no longer be able to contribute to the account, and access to certain features, such as loans, may be limited.

Another common choice is to roll over the funds into an Individual Retirement Account (IRA). This can be done through a direct or indirect rollover. IRAs often provide a broader selection of investment options compared to many employer-sponsored plans.

A less advisable option is to cash out the funds entirely. This action typically results in the distribution being treated as taxable income in the year it is received. Additionally, if you are under age 59½, the withdrawal may be subject to a 10% early withdrawal penalty from the Internal Revenue Service (IRS), in addition to federal and potentially state income taxes.

Finally, you may be able to roll over the funds into a new employer’s 401(k) plan, if the new plan accepts such rollovers. This option allows you to consolidate your retirement savings within your current employment structure.

Key Aspects of Rolling Over to a New Employer’s 401(k)

Rolling over funds into a new employer’s 401(k) plan presents several characteristics. One notable aspect is account consolidation, which allows you to combine multiple retirement accounts from previous employers into a single plan. This can simplify financial management by providing a unified view of your retirement savings. Having all funds in one location can make it easier to track performance and manage your overall investment strategy.

The new employer’s plan will have its own distinct set of investment options. These choices may differ significantly from those offered in your previous employer’s plan or an IRA, encompassing various mutual funds, exchange-traded funds, or other investment vehicles. Evaluate if the new plan’s investment selections align with your long-term financial objectives.

Each 401(k) plan also operates with its own fee structures and expenses. These can include administrative fees, investment management fees, and other charges that impact the net returns on your savings. Reviewing these costs assesses the new plan’s overall value.

Many 401(k) plans, including those offered by new employers, provide participants with loan provisions. This feature allows individuals to borrow money from their account, typically repaying it with interest back to their own account, which is generally not available with IRAs. The ability to access funds through a loan without incurring a taxable distribution can be a useful plan feature.

Federal law provides robust creditor protection for funds held within 401(k) plans. This offers a higher degree of asset protection compared to some other retirement accounts, such as IRAs. Additionally, integrating retirement savings into your current employer’s plan can streamline financial processes, particularly if you are making ongoing contributions through payroll deductions.

Preparing for a 401(k) Rollover

Thorough preparation is important before initiating a 401(k) rollover. This initial phase involves gathering specific details from both your former employer’s 401(k) plan administrator and your new employer’s 401(k) plan administrator. You will need information such as your old account number, the plan name, and contact details for the previous administrator. For the new plan, ascertain eligibility requirements, such as any waiting periods before you can contribute or receive rollovers, and obtain the receiving institution’s name and address.

A key decision point during preparation is choosing between a direct rollover and an indirect rollover. In a direct rollover, funds are transferred directly from your old plan to your new plan, avoiding immediate tax withholding. Conversely, an indirect rollover involves you receiving the funds personally, and if the distribution is from a 401(k) plan, the administrator is generally required to withhold 20% for federal income tax purposes. If you opt for an indirect rollover, you must deposit the full amount, including any withheld portion, into the new account within 60 days to avoid tax consequences and potential penalties.

You will need to identify and obtain the necessary forms from both plan administrators. These typically include a distribution request form from your old plan and a rollover initiation form for the new plan. Contacting the administrators directly or accessing their online portals are common methods for acquiring these documents. Accurately complete all informational fields on these forms, including personal details, account numbers, and your chosen rollover method.

Executing a 401(k) Rollover

Executing a 401(k) rollover involves several procedural actions. Begin by formally initiating the distribution or rollover request with your former employer’s 401(k) plan administrator. This typically involves submitting the completed distribution request forms you obtained during the preparation phase. The old plan administrator will then process your request according to their specific procedures.

Simultaneously, coordinate with your new employer’s 401(k) plan administrator to ensure they are ready to receive the incoming funds. This may involve providing them with details of the incoming rollover and completing any necessary receiving forms. Ensuring proper communication between both plan administrators can help facilitate a smoother transfer.

For a direct rollover, the funds are transferred directly from the old plan to the new plan without passing through your hands. This often occurs via an electronic transfer or a check made payable directly to your new employer’s 401(k) plan custodian for your benefit. This method helps avoid potential tax withholdings and the strict 60-day rule associated with indirect rollovers.

If you chose an indirect rollover, you will receive a check for the distribution, typically with 20% of the amount withheld for federal taxes. You then have a strict 60-day calendar period from the date you receive the funds to deposit the full amount, including the withheld portion, into your new 401(k) plan. If the full amount is not redeposited within this timeframe, the distribution may become fully taxable and subject to early withdrawal penalties if applicable. Once the funds have been submitted, you should expect to receive confirmation notices from both the old and new plan administrators, and you should verify the transfer by checking your new account statements.