Changing Jobs? Don’t Let Your 401(k) Give You a Headache

Arif Ali/AFP/Getty Images

Arif Ali/AFP/Getty Images

In an ideal world, you’d have a great job with a 401(k) plan and you’d keep both the job and the 401(k) until you retire. However, we don’t live in that ideal world, and the odds are that many people will leave their current employer at some point. What happens to your 401(k) then? One of your options is to roll the funds in your 401(k) into a new retirement investment vehicle. This is called a 401(k) rollover, and here’s what you need to know about it:

The Benefits of the Rollover

After you leave an employer, you have a few options for your 401(k) plan. One is to leave your 401(k) funds where they are. As long as you have more than $5,000 in your 401(k) account, it is likely that your employer and your 401(k) plan administrator will let you keep the account open. With this option, your 401(k) funds continue to increase and decrease with the market. However, if your 401(k) plan is heavy on fees, it might be worth your while to look for a better place to put your 401(k) funds.

Another option is to take an early distribution of your 401(k) funds and cash out. However, this is rarely the best choice. As CNN Money notes: “You’ll miss the compounded earnings you’d otherwise receive, you’ll likely get stuck with early withdrawal penalties, and you’ll certainly have to pay income tax on the amount withdrawn to Uncle Sam.”

The third option is to roll your 401(k) over into either a new 401(k) or an IRA account.

Rolling Your 401(k) Into a New 401(k)

If you get a new job with an employer that also offers a 401(k) plan, it is often possible to roll your old 401(k) into your new 401(k) plan. US News & World Report notes that there are sometimes obstacles to rolling an old 401(k) into a new one, but if you are transitioning to a new employer, it’s worth taking the time to learn about their 401(k) plan and your investment options.

Even if you do not plan to roll over your old 401(k) into a new one, it’s still a good idea to enroll in the new 401(k) plan and make contributions — especially if you get an employer match! Your new employer’s human resources department is likely to have the details of the new 401(k) plan and the steps you need to take to complete the rollover, so talk to them first and decide whether making the 401(k) rollover is right for you.

Rolling Your 401(k) Into an IRA

Many people choose to roll their old 401(k) into either a traditional or Roth IRA. In fact, many different sources, including the US News article cited above, suggest that the majority of IRA funds actually come from 401(k) rollovers.

As Nerdwallet notes, there are three potential benefits to rolling your 401(k) into an IRA: You’ll be able to manage your retirement portfolio from one place, you’re likely to get more options for your funds, and you’re likely to pay fewer fees. As always, pay close attention to your personal plan details and consider talking to a financial advisor to make sure you are, in fact, making the best choice for your finances.

There are two types of IRA rollovers. With a direct rollover, you directly transfer the funds from your 401(k) account into your IRA. With an indirect rollover, you receive a distribution of funds and have 60 days to transfer them into a qualified retirement account before they are considered an early distribution and you take the associated penalties.

What Type of Rollover is Right for You?

It’s hard to say what type of rollover is right for you until you take the time to look at the pros, the cons, the investment funds, and the fees associated with each investment vehicle.

Written by Nicole Dieker. The views expressed represent the opinion of the author and are not intended to reflect those of FutureAdvisor or serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities. Past performance is not indicative of future results.