Should I Rollover My 401k to New Employer?
I’ll give you the short answer right now: you should probably roll over your 401 k plan from your previous employer to your new one.
Now, to pull back a little bit, just in case. A 401k is a retirement savings plan that most employers offer. It most often comes in the form of a Target Date Fund. You make contributions from your paycheck; those funds get invested through your plan, which continues to build wealth until you retire. Usually, you can elect to enroll in the plan as soon as you’re hired. If you initially decided against enrolling, most employers will still let you opt-in at any point you choose to do so.
Because much of this happens in the background, it might not be top of mind when you switch employers. Unfortunately, forgetting about your 401k during this time can lead to some problems down the road.
Fortunately, those problems are avoidable—and performing a rollover can help!
What happens to my 401k after I leave my employer?
Whenever you leave your job, one of two things usually happens to your 401k. Either:
1. It remains with your previous employer
Leaving your plan with your previous employer is when things can become dicey. For one, it’s unlikely you’ll be able to continue contributing to the plan. Additionally, you could lose control over your plan, with your previous employer taking over the decision-making.
Finally, you run the risk of forgetting or abandoning the account. Believe it or not, this is a common problem. Nearly 3 million 401k plans are abandoned every year. The average balance for these abandoned accounts is $55,400. While those investments might continue to grow over the years, they do you no good if you can’t remember you have them!
Neither the 401k provider nor your previous employer are responsible for contacting you or reminding you about your account. That’s a large portion of your retirement income you could potentially never receive.
2. You receive a check (or other payment option) for your account’s balance
If you receive a payout for your balance, you have two options: keep it or reinvest it.
There are two things to keep in mind if you keep the money. For one, it stops growing. Because inflation goes up every year, cash loses value over time. Therefore, it’s unlikely to help you reach your retirement goals.
Second, taking the money counts as taxable income. And, if you’re younger than age 59 1/2 years old, it’s considered an early distribution. This means that you will have to pay taxes on the money at the end of the year, and you’ll likely also incur hefty penalty fees.
However, reinvesting it can help you avoid all of these problems! And your easiest option for doing so is performing a 401k rollover.
The 60-day rule
If you choose to perform a rollover, please be aware that it comes with a 60-day time limit. Once your previous 401k plan’s balance gets paid out, you have 60 days to deposit those funds into a new retirement account.
Like keeping the money from your plan, failure to roll your funds into a new retirement plan within the time limit can result in income taxes and early distribution penalties.
How do I roll over a 401k?
Luckily, rolling over a 401k from your previous employer’s plan to a new one is a relatively simple process.
No matter which option you choose, you should always gather your account information for both plans first. You’ll need information like the business names of both providers, the address where your funds are being sent, account numbers, and usually some personally-identifying information, such as your social security number.
It would help if you also considered contacting your new 401k provider to check that your information is correct and ensure they’re ready to receive the rolled-over funds.
Once you’re ready, you can begin the rollover process. You have two main options, but they only differ slightly. The two types of rollovers are:
A direct rollover is one where your funds go directly from one retirement plan to another. To perform a direct rollover, you should contact your previous employer’s plan administrator. Let them know you’d like to perform a rollover, give them the information about your new plan, and they should be able to send it directly to your new 401k provider.
Some administrators might offer this service online; though less common, others might not offer it at all. Consider contacting your plan administrator to discuss the options available to you.
There’s one main difference between a direct and an indirect rollover: with an indirect rollover, you become the middleman.
First, contact your previous 401k provider to let them know you’d like to initiate an indirect rollover. They’ll mail you a check for the balance of your account. They may withhold 20% of your balance just in case you decide against the rollover. If they do, you’ll need to contribute the missing funds yourself to complete the rollover (and avoid taxes and penalties). However, you’ll receive this money back from them once the process is over.
Then, you send that check to your new plan provider.
Again, make sure that your new provider is aware of the incoming funds and knows which account it’s going into.
And honestly—that’s it!
What retirement plans can I roll my 401k into?
This is an excellent question because you actually have several options. While there are limits, you can usually roll your 401k into any qualified retirement plan. These include:
- Another traditional 401k
- Roth 401k
- Traditional IRA
- Roth IRA
Please note that rolling over from a traditional 401k into any Roth plan can require additional paperwork and tax payments. This is because traditional 401(k) contributions are tax-deferred (made with pre-tax dollars), while Roth contributions are made with after-tax dollars.
The different plans also come with their own benefits and investment options.
For instance, a 401k plan might limit your options to a few selected mutual funds, whereas an IRA might offer a wider variety of choices.
On the other hand, your new job might offer employer match options for their sponsored 401k but not an IRA. This would mean that your employer contributes a matching percentage each time you contribute to your 401k. That’s free money that can help you build toward your retirement goals more quickly. While some employers offer matching contributions to some IRAs, such as Simple IRAs, it’s often reserved for a 401k plan.
Consider researching your options or hiring a financial advisor to help determine which plan best suits you and your goals.