How to Roll over a 401(k)

October 14, 2020

Whether you leave to go on your own or move to a new employer, leaving your job can be stressful and emotional. But when you say your goodbyes, remember that you're not saying goodbye to your 401(k). There are four options to choose from when dealing with an old 401(k): roll the money over into an IRA, roll it over into a new plan with your new employer, keep it with your old employer, or cash out. Here we're going to focus on the first two options and keep it simple, so you leave knowing exactly how to roll over your 401(k). Let's take a look.

Rolling Over into an IRA

Rolling over your 401(k) into an Individual Retirement Account (IRA) is an excellent option for many people leaving one job and moving onto the next. There are several reasons to do this:

  • You want to enjoy the increased flexibility that IRAs allow - You can hold virtually any type of asset, including stocks, bonds, mutual funds, real estate investment trusts, annuities, and more.

  • Your new employer doesn't offer matched contributions on their 401(k) plan.

  • You're attracted to the lower fees - IRAs typically have lower fees (or even no fees), whereas 401(k)s average 1-2% of your assets.  

Next, if you decide to go for the IRA option, you'll have to determine if you want to go for a traditional IRA or a Roth IRA. Essentially, the difference is between paying taxes now (Roth) or later (traditional). You can open the IRA of your choosing with a bank or brokerage firm. Just make sure you do your research into any fees and expenses, though.

The next step is to ask your 401(k) plan for a "direct rollover." These words are important - it means you'll get a check directly to your new IRA account (the one you opened in the last step) rather than a check delivered to you personally. The other option is an indirect rollover, where you get the money from the 401(k) and deposit it into the IRA yourself. However, this can be complicated and often creates tax complications, so direct rollovers are preferred.

Once the money has rolled over into the IRA, it's time to pick your investments!

Roll Over Your 401(k) Into a New Plan With Your New Employer

There are several benefits to this option too:

  • You can continue to grow your money tax-deferred.

  • You only have one retirement account, which makes saving for retirement straightforward. 

  • Employers are required to act in your best interest when it comes to investments.

  • Federal laws grant you broad protection against creditors. 

It's important to note that not all employers allow you to roll over from a previous employer, so you should always check.

The process for rolling an old 401(k) into a new one is simple. When you start your job (or have a guarantee of employment), contact the 401(k) administrator at your new employer. They will be able to give you a new account address for your new 401(k). You can then provide this address to your old employer, and they will perform a direct rollover.

Rahul Iyer

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