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How to Roll Over a 401(k): Know Your Options

Jul 24, 2019 3 min read Ilana Polyak

Key Takeaways

  • Rollovers offer advantages, but watch for tricky rules that ding you at tax time.
  • Consolidate. Your company might allow you to rollover that old 401(k) into your current one.
  • Sometimes it’s best to do nothing at all, especially if it’s in a low-fee plan.

 

If you’re like the typical American, you’ve probably had more than your fair share of jobs. In fact, younger baby boomers have held almost 12 jobs between the ages of 18 and 48, according to the Bureau of Labor Statistics Opens in new window.

 

 

Job hopping can provide opportunities for career advancement and higher lifetime raises, to be sure. But in the process, you might be leaving behind 401(k) accounts. In fact, 50% of people who have changed jobs have left behind an employee-sponsored retirement plan, such as a 401(k) or 403(b) account, and 20% have left behind an account worth over $50,000, according to a study by ING Direct Opens in new window. 

Leaving a retirement account where it is can be a viable option, especially if your old plan has good investment choices and is low cost. But it’s not the only way to go—nor is it always the best plan.  Here are some options to consider:

 

Roll over your 401(k) to an IRA

A rollover allows you to take the money in your retirement plan and roll it over into an individual retirement account or Roth IRA. The advantage is that you could have access to a wider range of investments, including individual stocks and alternative investments. If the plan you are leaving has a limited number of choices and is expensive, rolling over is something you may want to consider.

There are other potential upsides to a rollover:

  • Easy to keep track of your assets: All your assets are under one roof.
  • Big-picture investment strategy: Bringing all of your accounts together helps you make investments on the portfolio level, rather than the account level. Instead of deciding on the asset allocation of each account, you can decide how much you want in stocks, bonds and other asset classes across all of your retirement assets.
  • Alternative investment options: Even the best-designed employer retirement plan usually has a limited menu of investment options. A rollover could provide you access to a fuller menu of fund options at a brokerage firm, and even individual stocks.
  • May cost less: Rolling the money into an IRA may give you access to lower-cost vehicles.

If you decide to roll over into an IRA, decide whether you want a traditional tax-deferred account or a Roth, which, in exchange for taxes upfront, allows you to potentially grow your money—and eventually withdraw it—federal tax free. 

Remember, if you opt for a Roth IRA, you will owe taxes on any rollover amount.

Also, you may want to consider a direct rollover into your new IRA. If the money comes to you first, you have 60 days to deposit it into a qualified account; otherwise you’ll owe taxes and potential penalties. Your former employer will be required to withhold 20% for federal income tax if they send the check to you.  So you would have to make up that amount from other funds to be able to fully defer the taxable gain.  Mistakes and administrative delays can happen, you can limit that possibility by doing a direct rollover.

 

Roll over your 401(k) to a new employer’s plan

Some companies allow employees to roll their old 401(k) plans into their new accounts. As with a rollover to an IRA, you’ll be able to keep all your retirement assets together. This can be a good option if your new employer offers a diversified menu of low-cost investment options. Large companies tend to have a more diverse menu of investment choices and enough bargaining power to help keep fees down.

 

Leave your 401(k) in your existing account

If you’re looking to cut down on administrative headaches, leaving a 401(k) with your old employer may accomplish that. The account can maintain its potential to grow and you can make any investment changes you see fit (though you will no longer be able to make new contributions). But you also run the risk of forgetting about your account. After all, out of sight can often mean out of mind.

As a result, you may not be managing your investments in the best way; the portfolio you carefully designed in your 20s may no longer match your current risk profile or time horizon.  Remember, regardless of your decisions you should monitor your accounts at least annually to ensure they continue to meet your investment objectives. 

 

What you can do next

Amid the excitement of starting a new job, the fate of your 401(k) or other retirement plan may not be your first priority. But don’t forget to stay on top of it, whether it’s leaving it alone (but not forgetting about it), or rolling it into your new company’s plan or your own traditional IRA or Roth. Please consult your tax and legal advisors for advice pertaining to your particular circumstances.

 

Ilana Polyak is a freelance writer who specializes in personal finance and the financial advisory industry. Her work has appeared in The New York Times, Barron's, Kiplinger's Personal Finance, Bloomberg BusinessWeek and CNBC.com, where she is a frequent contributor.

 

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