If you've decided to leave your current job for another, you will need to decide what to do with the money that you have invested in your current company's 401(k) plan. Options typically include leaving it where it is, rolling it over to a new employer's plan, or opting for an individual retirement account (IRA) rollover. If you are about to change jobs, here's what you need to know about rolling over your funds into a new employer's 401(k) plan and the ins and outs of other options.
Key Takeaways
- Before rolling over your 401(k), compare plans between your old and new employer.
- It’s typically best to opt for a direct versus indirect rollover.
- If you choose to not roll over your 401(k), you may be able to leave your funds in the old plan and opt for an IRA rollover.
Compare Company Plans
Even if guidance about your 401(k) plan was provided by your company while you were employed, you may find information about rollovers strangely lacking. In most cases, the good news is that the time to make the decision to roll over your funds is flexible. You can take action as soon as you leave, or you can delay it.
Compare each plan's history of investment returns and expenses. Finding someone in your new company to help you compare your old plan with your new one shouldn’t be hard. Most employers have dedicated personnel who are willing to answer questions regarding the 401(k) plan, or there's a handy helpline for the plan administrator.
Move Money to New Employer's 401(k)
Although there's no penalty for keeping your plan with your old employer, you do lose some perks. Money left in the former company’s plan cannot be used as the basis for loans. More importantly, investors may easily lose track of investments left in previous plans.
For accounts holding between $1,000 and $5,000, your company is required to roll the money into an IRA on your behalf if it forces you out of the plan.
If you have at least $5,000 in your account, most companies allow you to roll it over. But accounts of less than $5,000 can be rolled out of the plan by the company if a former employee does not respond to a notification letter within 30 days.
For amounts under $1,000, federal regulations now allow companies to send you a check, triggering federal taxes and state taxes if applicable, and a 10% early withdrawal penalty if you are under age 59½. In either scenario, taxes and a potential penalty can be avoided if you roll over the funds into another retirement plan within 60 days.
How 401(k) Rollovers Work
If you decide to roll over an old account, contact the 401(k) administrator at your new company for a new account address, such as “ABC 401(k) Plan FBO (for the benefit of) Your Name.” Provide this to your old employer, and the money will be transferred directly from your old plan to the new plan or sent by check to you (made out to the new account address), which you will give to your new company’s 401(k) administrator. This is called a direct rollover.It’s simple and transfers the entire balance without taxes or penalty.
Another, even simpler option is to perform a direct trustee-to-trustee transfer. The majority of the process is completed electronically between plan administrators, taking much of the burden off of your shoulders.
A somewhat riskier method is the indirect or 60-day rollover in which you request from your old employer that a check be sent to you made out to your name. This manual method has the drawback of a mandatory tax withholding—the company assumes you are cashing out the account and is required to withhold 20% of the funds for federal taxes. This means that a $100,000 401(k) nest egg becomes a check for just $80,000 even if your clear intent is to move the money into another plan.
You then have 60 days to deposit the remainder (or make up the difference) in your new company’s 401(k) plan to avoid taxes on the entire amount, and possibly a 10% early withdrawal penalty. Even so, that withheld $20,000 has to be reported on your tax returnand could push you into a higher tax bracket. All 401(k) distributions must be reported on the recipient's tax return, anyway. The old plan administrator should issue you a Form 1099-R.
For example, you request a full distribution from your 401(k), which has a balance of $55,000. Using a direct rollover, $55,000 transfers from your plan at your old job to the one at your new job. If the payment is made to you in the indirect rollover, $11,000 is withheld for federal taxes, and you receive a check for $44,000. For this distribution to be completely tax-deferred, you must deposit the $44,000 from the 401(k) and $11,000 from another source into a qualifying plan within 60 days.
Not all companies allow a rollover of your old 401(k) to their plan. It's important to check with the new company plan administrator to determine if that's the case. If so, a direct rollover to an IRA could be the best option.
Rollover Exceptions
There are a few exceptions where parts of the 401(k) may not be eligible for rollovers. These include:
- Required minimum distributions (RMDs)
- Loans treated as a distribution
- Hardship distributions
- Distributions of excess contributions and related earnings
- A distribution that is one of a series of substantially equal periodic payments
- Withdrawals electing out of automatic contribution arrangements
- Distributions to pay for accident, health, or life insurance
- Dividends on employer securities
- S corporation allocations treated as deemed distributions
Roll Over 401(k) Into an IRA
For those who would prefer not to rely on their new company’s 401(k) plan's investment offerings, rolling over a 401(k) to an IRA is another option. Again, rollovers can be direct, directtrustee-to-trustee transfers, or indirect. Regardless of the method you choose, once you start the process, it has to happen within 60 days.
Do I Need to Roll Over My 401(k) to a New Employer?
No, you don’t have to roll over your 401(k) to your new employer’s 401(k). You’re also not required to roll over the funds to an IRA, depending on your account balance. You can leave the funds in your past employer’s 401(k) if you have at least $5,000 in the account.
How Long Do You Have to Roll Over a 401(k)?
There's no required timeframe for rolling over your 401(k). If your balance is less than $5,000, your previous plan may be required to roll over your account. Note that if you do decide to do an indirect rollover, you'll have 60 days to deposit the check into your new 401(k) or IRA.
Can You Leave Funds in Your Old 401(k)?
Yes, if your old employer will allow it—and as long as the balance is more than $5,000.
The Bottom Line
Before deciding what to do with your old 401(k), understand the options available to you first. The biggest pitfall to avoid is triggering taxes and a potential withdrawal penalty by not paying attention to the 60-day rule. The next most common problem is neglecting an old account. By following the above steps, neither will happen to you.
