Changing jobs can happen many times in the span of a career. But moving from one role or company to the next is always an adjustment, and it can be easy to put off figuring out what to do with the money in your former 401(k). A common choice is to roll over a 401(k) to a new employer — in other words, transfer your savings from one employer-sponsored retirement account to another, so you don't owe taxes on the money in the account. But when it comes to finding the best place for your 401(k) savings, you actually have a few options to consider.
Why Move Your Old 401(k)?
Your previous employer could require you to move your 401(k) out of their plan. They may not want to manage the cost and administrative work of letting you maintain your account after you leave. In this case, you would have to move your savings somewhere else.
Even if you can keep money in the old 401(k), however, there are advantages to consolidating your savings into your new retirement account. First, this can make managing your retirement plan simpler. Instead of having to keep track of paperwork, investments and the rules of multiple brokers, you can keep all your money in a single account.
This also helps you track your investment strategy. If you have a small amount of money in an old account, you may not pay as much attention. If your investment goals change — for example, if you decided to shift some of your allocation from stocks to bonds — you may forget to update your old account, which means your money may not be invested as you'd like.
And as crazy as it sounds, people do forget about money in old retirement plans. In fact, the National Registry of Unclaimed Retirement Benefits is a free resource that can help you locate lost or forgotten benefits. By rolling over to your current 401(k), you don't risk losing track of an old account.
Rolling Over Your 401(k) to an IRA
Transferring to your new 401(k) is not your only option. You could also move the money to an Individual Retirement Account (IRA), a retirement plan you open and manage outside of work. If you already own an IRA, you could transfer your old 401(k) funds into your existing account. If you don't have an IRA, you can open one through a financial institution: You request rollover forms, fill them out, and list your IRA account information. Keep in mind that if you move money from a 401(k) into an IRA, you can't withdraw funds penalty-free if you leave your employer during or after age 55 — as you could with a 401(k) — but must instead wait until age 59 1/2 to avoid the 10 percent penalty tax.
If your new job doesn't offer a retirement plan, an IRA would allow you to move your money and continue saving for retirement. Even if your new job does offer a 401(k), it could be worth comparing that plan against an IRA. If the 401(k)'s account fees are high or you don't like its investment options — and your employer doesn't offer a matching contribution — it may make more sense to use an IRA instead.
Rolling Over Your 401(k) to a New Employer
There are two ways to roll over a 401(k) to a new employer. First, you could request the retirement plan trustee transfer the money directly between the two 401(k)s so that it never ends up in your hands. (Your trustee might be the plan administrator, your old employer or an investment manager — whoever holds the assets of your plan in trust.) You fill out a rollover form with your new account information, and the trustee of your old 401(k) will then move the funds into your new plan. This is the simplest option, known as a "direct rollover."
Another option is to have your old 401(k) investment trustee transfer the money to you first, so it's in your bank account. You will then have 60 days to put that money into your new 401(k) or another qualified retirement plan. If you wait longer than 60 days, the IRS will count it as a withdrawal instead of a rollover. If that happens, you will owe income tax and, if you're younger than 59 ½, a 10 percent early withdrawal penalty on all the money taken out. You'll likely want to move quickly to complete the rollover to keep this from happening.
Keeping Money in Your Old 401(k)
Once you leave your old job, you'll no longer be able to add more money to the associated 401(k). Some employers will let you continue using the plan's investments for any money you contributed while working there, however. In some situations, this can make more sense than transferring the money to a new 401(k) or IRA through a rollover.
For example, if an old 401(k) has low fees because the employer was able to negotiate a discounted group rate, that could be a reason not to transfer. Or if there's an investment fund in the plan that's not available in your new 401(k), you might prefer your old account. You may want to ensure there's a clear financial benefit to keeping your old 401(k), because not transferring means you'll have one more account to follow.
There's a lot to plan as you change jobs — and maybe even a lot to celebrate — but finding the right spot for your old 401(k) should be a priority. Then you can settle into your new job knowing your retirement plan is still on track.