How To Transfer A 401(k) To A New Job

If you get a new job, you may be interested in rolling over the money in your existing 401(k) to the new employer’s retirement plan. Transferring your 401(k) may be in your best interest if you want to continue growing your retirement savings tax-free.

Plus, you’ll be able to reap the benefits that come with the retirement account at your new job. But what are the rules associated with rolling over your 401(k) to a new employer?

Let’s go over some of the basic guidelines for transferring your current 401(k) when you start a new job. Then, so you’ll know exactly how to handle your 401(k) transfer, we’ll walk through the process of rolling the money over into your new retirement account.

Why Should You Roll Over Your 401(k)?

Let’s consider some of the reasons why you might roll over your 401(k) plan to a new job. For starters, you won’t have to pay taxes on the funds until you make a withdrawal. The internal revenue service (IRS) has regulations for early withdrawals, and you’ll be subject to a 10% tax penalty if you request an early distribution before age 59 ½.

If you transfer 401(k) funds from one job to another, you’ll also benefit from a growing retirement account. So, if you’re focused on saving for retirement now, you’re setting yourself up for a prosperous future.

Understanding 401(k) Transfers

The IRS and your new 401(k) plan administrator may have guidelines in place to help move the funds from your 401(k) into a new retirement plan. Keep in mind that not all employers will accept a 401(k) rollover, so it’s important to touch base with your new 401(k) administrator to ensure the transfer is possible.

Below, we’ll look at some elements of the rollover process to consider before taking the steps to transfer your 401(k) to a new job.

Rules For Rolling Over Funds

The amount of money you have in your current 401(k) plan can determine whether the funds can be transferred to your new employer’s retirement plan.

If you have $5,000 or more in the 401(k) plan with your previous employer, you should be able to roll the money over to your new job – as long as your new employer allows 401(k) transfers.

If the 401(k) account has between $1,000 and $5,000, you have the option to either withdraw the money or transfer it to your new employer’s retirement account. If you don’t make a decision within 60 days of leaving your job, your previous employer will automatically roll the funds from your 401(k) into an individual retirement account (IRA).

If you have less than $1,000 in your 401(k), your previous employer may cash out the funds and send you a check. In this scenario, you’re subject to a 20% income tax withholding penalty from the IRS.

60-Day Rollover Policy

In most cases, you have 60 days to transfer the funds from your current 401(k) to the new job. If you’re just moving the funds from one account to another, this process is pretty quick and straightforward.

If you collect an IRA or 401(k) distribution (perhaps in the form of a check), then you have 60 days to roll the money to your new retirement account. According to the IRS, the 60-day policy starts from the day you receive the distribution. The catch is that if you don’t roll the funds over within the 60-day period, the money will most likely be taxed.

If you missed the deadline for transferring funds to your new employer’s plan, the IRS may be able to waive the 60-day requirement in some instances. You may be able to roll over your contributions to a new retirement plan after the 60-day period if:

●      You qualify for an automatic waiver of the 60-day requirement

●      You’re eligible for and use the self-certification procedure for the 60-day requirement waiver

●      You request and receive a private letter that waives the 60-day requirement

For more information on your eligibility to transfer 401(k) funds after the 60-day rollover period, visit the IRS website. 

Exceptions On Rollover Distributions

You can typically transfer all or part of any distribution from your previous employer’s 401(k) plan to a new one – except for a few types of distributions. According to the IRS, you can’t roll over the following distributions from your 401(k).

●      Required minimum distributions (RMDs)

●      Hardship distributions

●      Corrective distributions

●      Dividends on employer stocks or other securities

●      Distributions that will cover health, accident or life insurance

●      Loans that are considered distributions

How To Roll Over A 401(k) To A New Employer

Now that you have an understanding of the terms and conditions associated with rolling over your 401(k) to a new job, let’s dive into the process itself. Remember, not every employer allows a 401(k) transfer, so you’ll want to review the guidelines with your new 401(k) administrator before deciding what to do with your retirement funds.

Direct Rollover

A direct rollover involves moving the funds or distributions straight from your previous employer’s 401(k) to your new retirement plan. To perform a direct rollover, you’ll contact the 401(k) plan administrator at your previous job for instructions on how to proceed. You’ll likely need to provide information on your new employer’s 401(k) plan and fill out some paperwork.

Indirect Rollover

An indirect or 60-day rollover is an option where you have 60 days to deposit the account balance from your 401(k) into the retirement account at your new job. The IRS withholds 20% of your funds to cover federal income taxes and any applicable state taxes. You receive the remaining balance in your 401(k) as a check.

The caveat to the indirect rollover method is that you’re required to deposit the full amount of your 401(k) balance into your new account – including a 20% tax that was withheld.

Pros Of Transferring Your 401(k) To A New Job

If your new job allows a 401(k) transfer, there are several benefits of going through with the process. Let’s consider some of the advantages that come with rolling over your 401(k) to a new employer.

• Retirement savings are tax-deferred as they grow. If you transfer a 401(k) from one account to another, you won’t have to pay taxes on the funds until you make a withdrawal.
• It’s easier to manage one type of account. Sticking with a 401(k) plan can be simpler to manage than rolling the 401(k) into an IRA or a different type of retirement account.
• New investment opportunities may arise. Your new employer may offer different investment options than your former employer.
• The rollover process is simple. The direct rollover process is relatively straightforward as long as you have all the information and paperwork you need to complete the 401(k) transfer.

Cons Of Transferring Your 401(k) To A New Job

Here are some of the disadvantages that can accompany a 401(k) transfer from a former employer to a new one.

• Funds may be withheld. If you opt for the indirect rollover method, you have 60 days to transfer your full 401(k) balance to the plan. You’ll also have to come up with 20% of the balance on your own since the IRS will withhold this percentage until you submit your tax return. 
• You could lose out on previous investment choices. Your previous employer may have had investment options that you preferred over a new employer, so you may lose out on these investments in transferring your 401(k).
• You may incur fees: Your new employer may have fees associated with transferring a 401(k) from a previous job.

Alternative Options To A Rollover 401(k)

What can you do if your new employer doesn’t accept a 401(k) transfer? The good news is you still have options. Here are some common alternatives to rolling over your 401(k) when you get a new job.

Leave 401(k) Funds With Your Former Employer

You might be able to keep your 401(k) plan with your previous employer if they permit it. This may be the best option for you if your new employer doesn’t accept 401(k) transfers or your former employer’s 401(k) plan has lower fees and better investment options.

Convert Your 401(k) Into An IRA

Instead of transferring your 401(k) funds into a new employer’s retirement account, you could roll over your 401(k) into a traditional IRA or Roth IRA. Unlike with employer-sponsored retirement plans, you can choose which IRA provider to work with.

You also may have more investment options to choose from with an IRA versus a 401(k). Employers decide which types of investment securities to make available, so an IRA gives you that much more autonomy when deciding where to invest your retirement savings.

Cash Out Your 401(k)

You always have the option to take a lump-sum distribution or cash out your 401(k), but it’s important to first keep a few considerations in mind. If you withdraw funds from your 401(k) before reaching 59 ½ years of age, you’ll face a 10% early withdrawal penalty. You’ll also have to pay income taxes on the amount of money you withdraw.

The Bottom Line

Rolling over your 401(k) to a new employer can be a great option if you’re looking to streamline your retirement plan and continue growing your savings on a tax-deferred basis. And if your new employer doesn’t allow 401(k) transfers, you have other options for handling your 401(k) funds.

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