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What Are My 401(k) Rollover Options?

Oct 22, 2019 4 min read Nancy Mann Jackson

Key Takeaways

  • A 401(k) rollover can help you retain control of your retirement savings after you leave an employer.
  • You may have several 401(k) rollover options, including a 401(k) with your new employer or a personal IRA.
  • Deciding where to rollover your 401(k) funds is the hardest part. The rest is simply filling out the necessary paperwork.



If you're leaving a job with a 401(k), you may be wondering about your 401(k) rollover options. You made a wise move when you decided to contribute to an employer-sponsored retirement plan that allows tax-advantaged saving and investing for retirement. But once you leave the sponsoring employer, you're no longer able to contribute to that 401(k).

However, you still own the account and the funds in it and likely want to continue growing the account for future use in retirement. So what should you do with it?


What is a rollover?

A 401k rollover is simply moving the funds from your 401(k) or other employer-sponsored retirement account into a new or different account when you leave a job, usually with the same tax advantages.


401(k) rollover options

When you leave a job with a 401(k), you have a few different rollover options. For one, you may be able to leave the 401(k) with your former employer. While you'll no longer be able to contribute to the account, it could continue to grow. However, some employers don't allow former employees to maintain 401(k) accounts in their plan, and they could open an individual retirement account (IRA) in your name and transfer your balance to that IRA.

Because you'll have limited (or no) control over what happens to your 401(k) if you leave it with your former employer, the best bet may be to conduct a rollover of the funds into another account. If you have a new job that also offers a 401(k), you may be able to transfer the funds from your former 401(k) into your new one. You could also transfer the funds directly into your personal bank account, but you'd be required to pay taxes as well as a 10% early withdrawal penalty if you are under the age of 59-and-a-half.

The other option, which is the most popular, is to rollover your 401(k) funds into a personal IRA. An IRA is similar to a 401(k) because it offers tax-advantaged saving and investing for retirement. However, it's not affiliated with an employer. An IRA is your own personal retirement account, so you have the ability to manage it on your own or get help from a financial advisor with buying and selling investments and managing the account. Because it is also a tax-advantaged retirement saving vehicle, rolling your funds into an IRA does not trigger any new tax liability, nor does it require you to pay an early withdrawal penalty However, a 20% federal income tax withholding will apply to an indirect 60 day rollover.



How to transfer your 401(k) to an IRA

If you decide you'd like to transfer the funds from your 401(k) into an IRA, the process is fairly simple. You'll need to open an IRA or designate an IRA you already own as the receiving account.

Next, you'll need to complete the necessary paperwork to initiate the 401(k) rollover. Contact a representative from your former employer (usually someone in HR) to do this. Keep in mind that you need to wait until you've left your job before starting the rollover process. While you're still employed, you won't be able to complete a 401(k) rollover.

After you complete the paperwork, the funds transfer is the responsibility of your former employer and your financial institution. When it's done, you can start managing your retirement funds on your own and deciding how you want to invest so you can keep the account growing for your future retirement.


What you can do next

If you're planning to leave (or have already left) your job with a 401(k), take time to research your options for rolling over your 401(k) funds. Talk to your former employer, your financial institution and your new employer about the options so they can help guide you once you've made a decision.

Please consult your tax and legal advisors regarding your particular circumstances.

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