The Great Resignation of 2021 and 2022 has seen millions of Americans leave their jobs—either for new ones or for the great unknown. Those departing a job with a retirement savings plan must decide what to do with their 401(k).
Retirement savings are often one of the largest assets one might have, and employees have several choices when changing jobs and managing their 401(k). It’s essential to make an informed decision and consider potential consequences, eligibility requirements, and fees. Find out how to transfer a 401(k) to new job and what to consider.
4 Options for your 401(k) when you change jobs
What happens to your 401(k) when you change jobs is up to you. There are four options to consider.
1. Keep 401(k) as is
The option of least resistance is to keep a 401(k) as is, in the account administered by the former employer. This isn’t always an option, though, because the plan administrator must allow it and the 401(k) account balance often needs to be more than $5,000. According to the IRS, an employer may require that the account be moved if the balance is below $5,000.
This can be an attractive option for job hoppers who aren’t ready to make a decision yet or who are satisfied with the investment options and fees in their old employer’s plan.
- No action is required. No extra effort or time is needed.
- Can keep things as they are. Offers more time to adjust to the new employer.
- Benefit from existing plan features and fees. Current 401(k) may have better investment options and a lower fee structure than the new employer’s plan.
- May not be eligible. Depending on your balance and the plan administrator, you may be required to move 401(k).
- Can lose track of retirement accounts. Moving on to a new employer may mean forgetting about this old 401(k) altogether. “People lose them,” says Titan head of investor relations, John DeYonker. “They have no idea where they are and they can never locate them.”
- Not eligible for contributions. It’s not possible to contribute if you are not an employee. To continue contributing, you’d have to open a new account—either a 401(k) with a new employer or an individual retirement account (IRA).
2. Roll over 401(k) to IRA
While 401(k)s must be sponsored by an employer, individual retirement accounts (IRAs) are independent of employment. Even if an investor doesn’t take a new job right away—or their new employer doesn’t offer a 401(k)—they can roll their 401(k) funds into an IRA. Going this route can put retirement funds into the hands of the individual investor, so it’s no longer associated with an employer.
Traditional IRAs and Roth IRAs are both available for rollovers; however, there are different tax implications with each. 401(k)s are funded with pretax dollars, as are traditional IRAs, so rolling from a 401(k) to a traditional IRA usually will not trigger taxes. Roth IRAs are funded with after-tax dollars, though. So if an investor rolls from a 401(k) to a Roth IRA, they’re transferring pretax dollars into an after-tax account—which requires that the account holder pay taxes on the money they’re rolling over from a 401(k).
Another stipulation with Roth IRAs is an income limit. Roth IRAs are not available to everyone; an investor’s income must be below a certain threshold to be eligible to open one. A tax professional can help investors navigate eligibility and the tax implications of rolling a 401(k) into an IRA.
- Take back ownership of retirement funds. An IRA isn’t associated with an employer.
- Can choose between a traditional or Roth IRA. There are different options to consider with unique benefits and tax treatment. With a traditional IRA, the investor can continue contributing with pretax funds. With a Roth IRA, the investor contributes with after-tax money, but the growth is tax free.
- May offer increased flexibility. IRA funds may be used for education, home buying, and other purposes without a 10% early distribution tax.
- Requires paperwork. The rollover process requires paperwork and time.
- Not everyone is eligible to open a Roth. There are income limits in place that affect eligibility to open a Roth and how much one can contribute.
- IRAs have lower contribution limits. As of 2022, it’s only possible to contribute up to $6,000 in an IRA compared to $20,500 for a 401(k) or as much as $27,000 for those over age 50.
3. Rollover 401(k) to new job’s 401(k)
Another route to take is to transfer a 401(k) to new job and into the new employer-sponsored 401(k). Investors can verify with their new employer if this is possible. They can also review fees and the investment options offered to see if this is the best path to take.
- Keeps 401(k) funds under the 401(k) umbrella. 401(k)s have higher contribution limits than IRAs, meaning that one can invest more pretax money into a 401(k) than into an IRA.
- Streamline funds. Instead of having multiple 401(k) accounts, this option consolidates the old 401(k) with the new, so there’s only one account to keep track of.
- Avoid paying early withdrawal taxes. Doing a direct rollover where funds get moved via check from your old 401(k) to the new 401(k) can help avoid triggering a tax event.
- May have a different fee structure. A new employer’s 401(k) may charge more in fees. Investors can ask about 401(k) fees to understand total costs.
- New rules and options. The new employer may have a different set of rules for a 401(k), such as a years of service requirement for participation, and different investment options available.
- Less flexibility. In general, 401(k) accounts have less flexibility than IRAs when it comes to distributions.
4. Liquidate the 401(k)
One of the more controversial and least advised options is to cash out the 401(k) after leaving a job through a lump-sum distribution. In general, tapping 401(k) funds before age 59 ½ can result in a 10% early withdrawal penalty plus paying taxes on the distribution. For those 55 and older, this doesn’t apply.
- Access to funds. If in dire financial need, this is one way to access some of your own funds.
- Income taxes and penalty fees. Going this route means dealing with state and federal taxes and a 10% early withdrawal penalty.
- Lose out on investment gains. Taking money out of the market may lead to missed investment gains and compounding returns through time in the market.
- Being behind with retirement savings. Liquidating a 401(k) puts an investor at risk of falling behind with retirement goals. This could result in needing to work longer or having to cut back more.
Side note: Try Titan’s free 401(k) Calculator to project how much your 401(k) will give you in retirement.
What are the steps I need to follow to roll over a 401(k) to my new employer?
There is a specific way to transfer a 401(k) to new job that is tax-free. The simplest is for investors to have their 401(k) account transferred directly to another 401(k) or IRA without any taxes being withheld.
The other option is for an investor to have their old plan administrator send them a check for the funds, which they are responsible for depositing into the new retirement savings account. Under this option there is a window of 60 days to complete the rollover.
Here’s the fine print to be aware of and why this route is not ideal: If a distribution check is made out to you personally, rather than to the next fund, 20% must be withheld for taxes. If the individual investor wants to defer tax from the distribution they’ll need to fund the difference based on what was withheld with other sources of income. When tax time hits, if the full amount is rolled over, it’s possible to get a refund of the taxes withheld. Not adding the extra amount withheld may result in a 10% early withdrawal penalty as well.
Investors who don’t want 20% withheld should ask the old plan to issue the check to the next fund. Even if the old plan mails the check to the investor, as long as it’s made out to the next fund, no withholding is needed.
To avoid taxes being withheld, choose the direct transfer option between your old 401(k) and your new 401(k). Here’s how to rollover 401(k) to new employer.
Step 1: See if your new employer allows rollovers
The first step is to assess the feasibility of a rollover, because not all employers allow them. Employees should discuss the possibility with their new employer first.
Step 2: Contact your new employer’s 401(k) plan administrator to initiate a rollover
Get in touch with the new employer’s 401(k) plan administrator and obtain information about the account to initiate a rollover. This may include the contact information for the custodian of the account, account number, and process for rolling over a 401(k).
Step 3: Get in touch with the previous 401(k) plan administrator to rollover funds
After getting relevant information from your current plan administrator, get in touch with the previous 401(k) plan administrator to roll over funds. Request a distribution. This may be through a direct rollover—with a check from the current retirement custodian going directly to the new retirement custodian. An indirect rollover is where the check goes to the employee, who must rollover within 60 days.
Step 4: Wait for funds to transfer
It may take several weeks for the funds to be transferred from your old 401(k) to the new 401(k). Keep a paper trail and don’t be afraid to ask questions if needed. The previous and current plan administrators may be able to help.
Step 5: Set up contributions to the new 401(k)
Once rolling over your 401(k) is complete, set up contributions with your new employer. Contributions may be automatically deducted from wages. Consider monthly budget, time horizon, and investment goals when setting contributions.
The bottom line
“Should I rollover my 401(k) to new employer?” is a common question for many investors, but the answer is personal. Going the direct transfer route to your new employer’s plan can ensure you streamline 401(k) accounts. It’s possible to rollover to an IRA as well. Consider investment options, various fees, eligibility, and how your decision will impact your retirement goals.