Changing jobs is a significant event in anyone’s career, and one important aspect that many people overlook is what to do with their 401(k) retirement plan from their previous employer. When you change jobs, you have several options regarding your 401(k), and understanding these options is essential for ensuring that your retirement savings continue to grow and that you’re not hit with unnecessary fees or taxes. One of the most popular options is rolling over your 401(k) into a new account. This detailed guide will walk you through the process of rolling over your 401(k) after changing jobs, including your options, the steps involved, and the benefits of doing so.
Why You Should Consider Rolling Over Your 401(k)
When you leave a job, your 401(k) account stays with your former employer’s plan until you take action. One option is to leave the funds in your previous employer’s plan, but there are several reasons why rolling over your 401(k) into a new account may be the best choice for you:
- Consolidation of Accounts: If you have multiple 401(k) accounts from previous employers, rolling them over into a single IRA or 401(k) can simplify your retirement planning by consolidating your savings.
- Better Investment Options: Many employer-sponsored 401(k) plans offer limited investment options. Rolling over your 401(k) into an IRA often provides access to a broader range of investment choices, including individual stocks, bonds, and mutual funds.
- Lower Fees: Some 401(k) plans charge higher administrative fees than IRAs or other retirement accounts. By rolling over your 401(k), you may be able to lower your fees and increase your investment returns over time.
- Maintain Control: Rolling over your 401(k) into an IRA gives you more control over how your money is managed. You can choose an IRA provider that aligns with your investment preferences and goals.
Overall, rolling over your 401(k) can help ensure that your retirement savings remain well-managed and continue to grow without unnecessary complications.
Step 1: Decide Where to Rollover Your 401(k)
The first step in rolling over your 401(k) is deciding where to move the funds. You generally have four options when it comes to rolling over your 401(k) after changing jobs:
Option 1: Rollover into Your New Employer’s 401(k) Plan
If your new employer offers a 401(k) plan, you may be able to roll over your previous 401(k) into your new plan. This is a good option if you want to keep your retirement savings with your current employer and continue contributing to your 401(k) as you move forward in your career.
Before proceeding with this option, you should check whether your new employer’s plan accepts rollovers from previous employer plans. If so, you will also want to compare the fees, investment options, and any employer matching contributions available in your new 401(k) plan to determine if it’s the right choice for you.
Option 2: Rollover into an Individual Retirement Account (IRA)
One of the most popular options is rolling your 401(k) into an IRA. IRAs offer more flexibility in terms of investment choices and typically have lower fees than 401(k) plans. There are two types of IRAs that you can roll your 401(k) into:
- Traditional IRA: A traditional IRA allows you to keep your retirement funds tax-deferred, just like your 401(k). You won’t pay taxes on the rollover amount until you start making withdrawals during retirement.
- Roth IRA: If you decide to roll your 401(k) into a Roth IRA, you will need to pay taxes on the rollover amount since Roth IRAs are funded with after-tax dollars. However, Roth IRAs offer tax-free growth and withdrawals during retirement.
Rolling over into an IRA can be a great option if you want more control over your investments, more investment choices, and potentially lower fees. However, it’s important to understand the tax implications of rolling over to a Roth IRA, as you’ll need to pay taxes on the amount rolled over, which can be a significant cost depending on your 401(k) balance.
Option 3: Leave Your 401(k) with Your Previous Employer
If you’re satisfied with the investment options and fees in your previous employer’s 401(k) plan, you can choose to leave your funds there. There is no requirement that you move the funds immediately after leaving a job, but this option comes with some downsides:
- Limited Control: You won’t have access to the same level of control over your retirement savings as you would with an IRA or new 401(k) plan.
- Possible Fees: Your previous employer’s 401(k) plan may have higher administrative fees than other options.
- Fewer Investment Choices: Your old 401(k) plan may offer fewer investment options compared to an IRA or your new employer’s plan.
If you do choose to leave your 401(k) with your previous employer, make sure to monitor the plan and be aware of any changes that may occur over time.
Option 4: Cash Out Your 401(k)
You also have the option to cash out your 401(k), which means withdrawing the entire balance as a lump sum. However, this is generally not recommended because:
- Early Withdrawal Penalty: If you’re under the age of 59½, you’ll likely face a 10% early withdrawal penalty, along with income tax on the distribution.
- Lost Tax Benefits: By cashing out, you forfeit the tax-deferred growth that your 401(k) provides.
Cashing out your 401(k) should only be considered as a last resort. It’s generally better to rollover your 401(k) to preserve your retirement savings and allow them to continue growing.
Step 2: Contact Your Previous 401(k) Plan Administrator
Once you’ve decided on where to rollover your 401(k), the next step is to contact the administrator of your old 401(k) plan. The plan administrator will provide you with the necessary forms and instructions for completing the rollover process. If you’re rolling over to a new 401(k) plan or an IRA, the administrator will send your funds directly to the new account, either through a direct transfer or via a check made out to your new account.
Be sure to ask the following questions when contacting the administrator:
- What is the process for requesting a rollover? Ensure you know all the steps and forms required to complete the rollover.
- Are there any fees associated with the rollover? Some plans may charge fees for processing the rollover, so it’s important to clarify any costs upfront.
- How long will the rollover take? Ask for an estimated timeline for completing the rollover so you can plan accordingly.
Step 3: Complete the Rollover Process
Once you have all the necessary forms and information, you can initiate the rollover process. Depending on where you’re rolling your 401(k) funds, this process may differ slightly:
Rolling Over to a New Employer’s 401(k) Plan
To roll over your 401(k) into your new employer’s plan, you will need to provide the new plan administrator with details about your old plan and follow the instructions provided. Your new employer’s plan will then handle the transfer of funds from your previous 401(k) to the new one.
Rolling Over to an IRA
To roll over your 401(k) into an IRA, you will need to provide your chosen IRA provider with your old 401(k) information. The provider will guide you through the process of completing the rollover, which can often be done via wire transfer or check. If you are rolling over to a Roth IRA, be prepared to pay taxes on the rollover amount.
Step 4: Monitor Your Rollover
Once the rollover is complete, it’s important to monitor the process to ensure that everything is handled correctly. You should receive confirmation from your new 401(k) plan or IRA provider that your funds have been successfully transferred. Be sure to keep track of any changes to your retirement accounts, including fees, investment options, and account balances.
Conclusion
Rolling over your 401(k) after changing jobs is an important step in managing your retirement savings. By understanding your rollover options and following the steps outlined in this guide, you can make the best choice for your financial future. Whether you roll over your 401(k) into your new employer’s plan or an IRA, the goal is to preserve and grow your retirement savings without incurring unnecessary fees or taxes. Remember to consult with a financial advisor if you need help making the right decision for your situation.
