Should You Transfer Your 401(k)?

A 401k plan is a popular retirement saving account. It allows employees to contribute pre-tax dollars from their salary, which can grow tax-free until they retire. However, some circumstances may arise where an employee may consider transferring their 401k balance. 

Why you may want to transfer your 401k, for instance, you left the job and want to consolidate your retirement savings into a single account, or you may want to take advantage of investment options not available in your current plan. 

Before deciding to move your funds, you should consider the following: 

Keep your assets in your previous employer’s 401(k) plan.

If your former employer’s 401(k) allows you to keep your account and you are satisfied with the plan’s investment options, this may be the most efficient option. However, you should still consider the alternatives. Thousands of American employees lose track of millions of dollars in old retirement savings accounts every year, so you should keep an eye on your account, review your investments, and inform your beneficiaries.

You need to contemplate the following if you are keeping your money in your former employer’s plan: 

The sum of money available in your account: Your former employer may require you to withdraw funds if you have less than $5,000 remaining in your 401(k) plan. An employer will likely issue you a check for the difference if your account balance is less than $1,000. To avoid paying taxes and a 10% early withdrawal penalty, you must deposit the check into your new employer’s 401(k) plan or an IRA within 60 days.

Employer shares: If your account contains publicly traded stock in your former employer that has significantly increased in value, the tax benefits you received from in-kind distributions of the stock will be lost if you roll over your account into your new employer’s 401(k) plan or an IRA.

Vesting: If your former employer makes matching contributions to your 401(k), the funds typically vest over time. If you are not entirely vested when you leave your employer, you can only keep a portion of the match, if any at all. Ensure you understand your company’s vesting schedule by consulting your plan administrator.

Fees: Saving for retirement with a 401(k) is convenient, but its transaction and maintenance fees can significantly affect your long-term returns. As you compare options, ensure you know the precise fees you will incur. 

If you are considering rolling over your 401(k) plan to your new employer.

Transferring your previous 401(k) to your new employer’s qualified retirement plan after changing jobs is also an option. The new plan might have lower fees or investment options that support your financial objectives more effectively. 

Additionally, if you convert your old 401(k) plan to your new employer’s plan, you can keep track of your retirement savings more easily. It is advantageous to speak with a financial advisor who can compare the investments and features of the two plans.

If you are considering transferring your 401(k) to a new company’s plan, consider these factors: 

Transparent rollovers: Direct 401(k) rollovers allow you to transfer funds directly from your former plan to your new employer’s plan, tax-free and penalty-free. Then, you can collaborate with the plan administrator of your new employer to determine how to allocate your savings among the new investment options.

Transfer regulations: Failure to adhere to 401(k) transfer regulations may incur additional penalties and taxation. If you do not perform a direct rollover and instead receive payment from your previous employer’s plan, you will be subject to a 20% mandatory withholding. The check will also be subject to a 10% early withdrawal penalty if it is not deposited within 60 days of receipt and you are under 59.5 years old. 

Loans: Some employer-sponsored retirement plans permit you to borrow against your 401(k). If you roll your prior plan into your new plan, you may be able to borrow against a larger balance. You will be required to repay the loan with interest over time, and generally, only active employees are eligible. It is also important to understand the long-term consequences of taking out a loan against your account, so make sure you balance your options carefully and consult your financial advisor about the pros and cons.

Should you transfer your previous 401(k) to an individual retirement account (IRA)?

Alternatively, you can roll your former 401(k) into an IRA. An IRA rollover gives you access to a wider range of investment options since you will no longer be enrolled in your employer’s retirement plan. Depending on your investments, a rollover may save you money on management and administrative fees, which can nibble away at investment returns over time. The tax consequences of transferring an old 401(k) into an IRA vary according to the option you choose.

Traditional IRA reinvestment: When you transfer the funds from your old 401(k) to a traditional IRA, no taxes will be due, and any future earnings will accumulate tax-deferred. You will only have to pay taxes on withdrawals. 

Roth conversion: If you qualify, you can transfer over all or a portion of your old 401(k) directly into a Roth IRA. Rolling over a traditional 401(k) to a traditional IRA is similar to converting a traditional 401(k) to a Roth IRA, with one additional step: paying taxes on the converted funds. A Roth is funded with after-tax dollars, whereas a traditional 401(k) is funded with pre-tax dollars. If your Roth IRA has been open for five years and you are at least 59.5, any accumulated earnings will be eligible for tax-free withdrawal once the conversion is made.

Transfer your Roth 401(k) account to a Roth IRA: A traditional 401(k) is funded with pre-tax dollars, whereas a Roth 401(k) is funded with post-tax dollars. Transferring funds from a Roth 401(k) to a Roth IRA is tax-free, and any new earnings accumulate tax-free, subject to certain conditions.