How to rollover your 401k to a new job

You’ve likely gone through a job change at least once in your career — and if you haven’t yet, there’s a good chance you will. While there are several things you need to do when you change jobs, figuring out the next steps for your 401(k) is an important one. Below, we’ll explore how to transfer a 401(k) to a new job and explore alternative options for your retirement money.

How do you transfer your 401(k) to a new job?

Transferring your 401(k) to a new job means combining two accounts into a single 401(k). An important step to remember is to check with your new 401(k) provider to ensure that they accept 401(k) “roll-ins.” This means you can transfer outside 401(k) plans into the new one. Most plans do allow this, but it’s best to check first to make sure.

Then, you’ll need to set up your 401(k) plan at your new job. Once you’ve established a new 401(k) account at your new employer, you’ll need to follow a few steps to transfer the money via a direct or indirect rollover.

Direct 401(k) Rollover

With a direct rollover, the money from your previous employer’s 401(k) plan will be sent directly to the new provider without ever being deposited in any of your personal accounts. This is the most common and recommended route. To execute a direct 401(k) rollover, follow the below steps.

• Contact your previous 401(k) plan provider and request that your account is liquidated.
• Request a check for the entire balance made out to your new plan provider for your benefit. The “pay to” line should say “New Plan Provider FBO Your Name.” We’ll discuss why this is important below.
• If the check is sent directly to your new plan provider, your work is done. The money will automatically show up in your new 401(k) within a matter of days.
• If the check is sent to your mailing address, you’ll need to take the final active step of sending the check along to your new 401(k) plan provider. Your new provider will have mailing instructions on their website; if not, you can simply call and ask for instructions.

Indirect 401(k) Rollover

An indirect rollover means your old employer’s 401(k) funds will go to you directly, then you’ll transfer the money to your new 401(k). It’s important to note that if you choose an indirect rollover and do not transfer the entire pre-tax balance to your new 401(k) within a 60-day period, the IRS will view this as a distribution, and you’ll likely face tax consequences. For this reason, it makes sense to choose the direct rollover when possible — don’t touch the money if you can avoid it! However, if you do choose an indirect rollover, you’ll complete the transaction using the steps below.

• Contact your previous plan provider and request that your account is liquidated.
• Request a check made out to you as an individual and have it mailed to your address.
• Deposit the check in your personal bank account.
• Initiate a transfer of the funds to your new 401(k) plan provider.

Why would you transfer a 401(k) to a new job?

As with any financial decision, there are pros and cons of transferring a 401(k) to a new employer. Among the benefits of doing so are:

 Simplifies retirement planning.

It’s far easier to manage your retirement accounts when they’re few in number. It’s also administratively easy to deal with only one 401(k) plan provider. Generally, consolidation by transferring a 401(k) to a new job will save you a great deal of time and headache.

Makes future tax planning easier.

Having your 401(k) accounts in one place allows you to easily see all of your employer-plan retirement dollars in one place. This will give you more control and clarity over the potential tax consequences of removing or rolling over money. It will also streamline your meetings with a tax professional.

Potentially lower fees could mean more money in your account.

Many 401(k) plans come with outdated investment menus and in some cases, unexpected fees. Scattered accounts tend to get forgotten — and these forgotten 401(k)s cost more than you think.

Better understand your retirement finances.

If you’re taking the active steps to roll over your retirement account, you’ve spent at least some time thinking about how this might work. Perhaps you’ve even gone far enough to research the mechanics. When it comes to personal finance knowledge, more is always more, so it’s a good idea to learn about these transfers when you have to set one in motion.

Why should you not transfer a 401(k) to a new job?

Aside from the many advantages, there are some disadvantages to consider:

There will be upfront work required to transfer your 401(k) to a new job

You’ll need to do a bit of research before initiating a 401(k) transfer. Reading through both 401(k) plans (your old one and new one) can take a little time to determine which has the better investment options and lower fees. You’ll also need to take the time to call your previous plan provider to set the process in motion.

Your new 401(k) plan may have higher fees than your old one.

In this case, you might not want to move your old plan into one that’s more expensive — and that’s understandable. Ideally, you moved to a new employer with a great 401(k) plan, but that’s not always the case.

Alternatives to transferring your 401(k) to a new job

If you’re not sold on doing a 401(k) transfer to your new job, there are several alternatives to consider.

401(k) rollover to IRA

Similar to transferring a 401(k) to a new job, a 401(k) to IRA rollover is another option. Instead of moving your 401(k) into another 401(k) with your current employer, you’d roll the funds into an individually-owned IRA. Since you own the IRA, there isn’t any impact on the account when your employment changes in the future. Capitalize can help you explore reasons to roll over an old 401(k) into an IRA to see if this option makes sense for you.

Keep the 401(k) with your old employer

If your previous employer’s 401(k) plan had great investment options and low fees, you might decide to keep your money there until a future date. However, you’ll want to keep in mind that future withdrawal options may be limited, and you likely won’t be able to take a 401(k) loan if necessary.

Cash out the funds from your 401(k)

Unless you have no other options and are in a dire financial situation, it’s not a smart financial move to cash out a 401(k) before you turn 59 1/2. After that age, you won’t be subject to the 10% early withdrawal penalties. If you’re thinking about cashing out a 401(k), it’s always best to consult with a financial or tax professional to understand the implications.

Should I transfer my 401(k) to my new job?

In most cases, transferring your 401(k) to a new job makes sense. It’s typically better to have your 401(k) funds in one place if the variables align properly (i.e., you’re offered a better 401(k) plan at your new job, and you’d like easier control over the funds).

But this is not to say there aren’t many instances where you’d be better off leaving it as is or even looking into an IRA rollover. The only one that can truly determine if you should roll over your 401(k) is you; if you’re having trouble making a decision, you can consult with a fee-only financial planner to discuss your particular situation.

Regardless if you decide to transfer your 401(k) to a new job, take time to understand the pros, cons, and potential tax consequences of any decision you make surrounding your old 401(k).

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