How to Rollover a 401k (and How to Determine If You Should or Not)

About half of Americans have access to a workplace retirement plan like a 401k.

If you’re one of them and have also had more than one job in your career, chances are good that you don’t just have your current 401k… you have one (or more) from previous employers, too.

You might have moved on with your career, but don’t forget about those accounts that you might have left behind.

There’s nothing inherently wrong with having old 401ks with previous employers — but there are several good reasons to consider how to rollover a 401k and decide where that old plan should go next.

The Basics: What Is a 401k Rollover, and Is It Worth Doing?

If you’ve heard of this term but don’t really know what it means, it’s pretty simple:

A 401k rollover is the process of taking a plan you had with an old employer and moving the current balance into a new account that you can continue to manage.

Taking control of your retirement plan is the biggest reason to consider how to do a 401k rollover. When your account stays with your old employer, you can’t keep contributing to it.

You also can’t make decisions about what funds you invest the balance in (you’re limited to what’s available in the old plan), or decide what investment company you want to keep the account with.

This matters for a few reasons:

  • You don’t have the option to contribute to an old 401k plan if you don’t roll it over somewhere.
  • Your old plan may offer limited investment options (whereas your new plan might have a better selection, and an IRA will certainly give you your choice of where to invest).
  • Your old plan could carry high fees, which will impede long-term growth (and leave you with less money than if you invested with lower-cost options).

Finally, it really matters if your account balance is under $5,000, as some employers won’t keep smaller accounts on their plan. They’ll force you to take your 401k elsewhere — although this could happen even with larger account balances.

Know Your Options When You Rollover a 401k

Rolling over a 401k could allow you a better investment selection for your long-term savings, lower fees on those investments, and it also offers the added benefit of keeping your financial life a little more organized.

For example, if you currently have all your accounts with an investment company like TD Ameritrade, Fidelity, or Vanguard — but you have two random 401ks from previous employers floating out there with some other custodian — it’s easy to lose track of those old plans or fail to account for them in your planning.

But if you can rollover a 401k to the same place you already keep all your other investments, you can stay better organized and aware of all your money (and perhaps even consolidate, reducing the number of accounts you have to track, if you roll the plan into an existing IRA).

There are clear advantages to doing a rollover — but where should you move the old plan?

Most people are often better off doing one of two things:

  1. Roll the account into your new 401k plan with your current employer
  2. Roll the account over into another retirement plan that you control (which, in this case, would be an IRA)

If you don’t have a current 401k, rolling over your account into an IRA will probably be your best bet so you can continue to contribute to your retirement nest egg and enjoy the tax-deferred benefits.

Before You Make Any Moves, Know What Absolutely NOT to Do

The one thing you absolutely do not want to do is liquidate or withdraw from your old 401k. This hurts you in a number of ways.

The most obvious is that withdrawing from your 401k before you reach age 59 and 1/2 will, in most cases, result in a 10% penalty. You will also have to pay ordinary income taxes on the amount you take out.

But there are other problems. If you take currently-invested funds and move them to cash, as you would with a withdrawal, you prevent that money from staying in the market where it has the potential for earning compounding returns.

Compounding returns are part of what make investing for the long-term such a powerful, effective tool in reaching major goals, like funding your lifestyle in retirement or reaching financial independence.

Don’t rob yourself of this opportunity by withdrawing from a 401k, even if you’re not working with that employer anymore. Simply roll the account over into your new plan or a new or existing IRA.

On a similar note, when you go through the process of actually rolling the account over, you may have the old plan custodian cut you a check for the balance of the plan. It’s critical to immediately forward that check to the new investment company or plan provider.

You have 60 days to move that check along from your possession and to the custodian of the account you want to roll the funds into. If you take more than 60 days, that will count as a distribution and you’ll be penalized as detailed above.

Deciding Where to Rollover a 401k: Questions to Ask Yourself First

If you don’t have a new 401k with your current position, the answer on what to do is usually pretty simple: roll the account over to an IRA.

(That being said, there are times when leaving the old 401k where it is makes sense — this is why it’s important to talk to fee-only financial planner about your specific situation so you can make the best decision for you!)

If you have a current plan, the decision becomes a little harder to make. Now you have to choose — should you rollover a 401k into a new plan, or into a new or existing IRA?

Here are a few considerations to work through and questions to ask yourself to help determine what makes the most sense:

Does your old retirement plan have a balance $5,000 or less?

If so, you don’t have much of a choice. You need to roll that sucker over into an account you can continue contribute to in order to keep building that balance and your nest egg.

Do you have a retirement plan offered through your current employer?

Again, if not, your best bet may be to rollover to an IRA. This is probably better than leaving the account where it is because:

  • Rolling over allows you to choose the custodian you want to use.
  • Using an IRA gives you essentially unlimited investment choices (whereas staying with your old plan means sticking with whatever happens to be available in the plan).
  • Changing investment companies may allow you to lower fees.
  • You can keep funding the account (whereas if it stays with the old employer, you can’t contribute to it).

Do you want to manage your investment accounts yourself?

If not, you may simply want to rollover a 401k from a previous employer into your current retirement account. Or, you could roll it over to an IRA and utilize a fee-only financial advisorwho could manage it for you.

If you prefer the DIY route, you can rollover a 401k into an IRA with a custodian of your choice. Vanguard is often the top choice for DIY investors thanks to its index funds and low costs.

Do you have a plan for reinvesting cash from a rollover if you want to DIY?

Just make sure that if you do choose a DIY route, you’re prepared to put in the time and effort to manage your investments well.

That’s often less about managing the actual money than it is about managing your behavior, which is where most investors struggle and tend to fail.

Do you want to choose your own custodian?

If so, you’ll probably want to roll your 401k over into an IRA so it’s in your control. Otherwise, you’ll have to use whatever your current employer offers via their retirement plan for employees.

Is there a difference in fees between your current plan and an IRA?

Some employer plans come with very high investment fees — and if this is the case for your current plan, rolling over a 401k into your own IRA might be a better way to go so you can reduce your expenses.

Do you want the ability to do backdoor Roth conversions?

This gets into some advanced and complex planning topics, but in short, if you want to be able to do a backdoor Roth in the future, you might want to rollover a 401k to an IRA.

But this isn’t a black and white decision, and this is another example of where it makes sense to verify the best course of action with a fee-only planner before jumping into a decision you can’t reverse.

Get more financial know-how, insights, and information that you can actually put to use in your life. Check out the blog at Beyond Your Hammock or subscribe to the Beyond Finances podcast.

#FinancialPlanner helping 30 & 40-somethings build #wealth & think differently about #money • Top #FinancialAdvisor in #Boston •

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store