How to Roll Over 401k To A New Employer

401k and IRA

Getting a new job often means having to make big decisions about what to do with your employer-sponsored retirement plan.

Many employers provide employees with either a traditional 401k, Roth 401k plan, or similar option. These plans provide big benefits to individuals during their employment. The majority allow employers to contribute and even match an employee’s investment. And, they are all tax-advantaged, meaning they can help you reduce your tax burden significantly.

But, what happens when you decide to switch jobs?

According to the U.S. Department of Labor’s Bureau of Labor Statistics, people don’t stay at their jobs very long. In fact, they found that, for employees between the ages of 25 and 34, the median tenure is just 3.2 years and, overall, most wage and salary workers spend 4.6 years with an employer.

Even if you’ve been there longer, making the move can mean better things. Nevertheless, you don’t want to leave behind or mismanage your 401k.

Why You Shouldn’t Cash Out Your 401k When Switching Employers

There are several options available for what to do with your 401k. However, the most expensive mistake you can make is cashing it out.

Doing this significantly limits your ability to save for retirement. It also means you will likely pay as much as a 10 percent penalty as well as the full tax on the amount. Cashing it out can cost you significantly simply because of the tax you’ll pay on it.

What Are Your Options To Roll Over 401k To A New Employer?

Instead of cashing out your 401k before switching jobs, you need to ensure it moves properly, according to tax laws, to a new investment option.

Here are some examples of the options you can take to manage your 401k when leaving an employer.

Move It to Your New Employer

If your new employer offers a retirement account, you can roll over the funds to the new provider.

This is the least extensive process and rather straightforward. There is no penalty to moving it to the new plan from your new employer. Keep in mind, this does not mean it is the best option either.

  • Determine what type of plan your employer offers. If it is not a 401k, there may be some differences in taxation you need to pay.
  • Find out who is managing the new plan. Be sure they are offering desirable investment strategies.
  • Do your research. Find out what the costs and fees are with the new employer. Find out if they contribute, too.

Leave It With Your Old Employer

The organization managing your employer’s plan may allow you to remain with it. There are a few factors when considering this option.

  • Be sure you know the associated costs. Because you are no longer with the employer, you may need to pay higher costs.
  • Determine if the plan your employer is offering is the best for you. If you have other options – including moving to another employer or other investment plan – don’t avoid doing so because it seems “simple” to stay with this plan.
  • Talk to the organization about your options. Be sure they align with your financial goals. Make adjustments as needed.

Invest in a Rollover IRA

A rollover IRA, another type of retirement planning vehicle, can be the best option in some situations.

The fees on a rollover IRA tend to be lower. These plans are available in various locations, including a bank or credit union. You can also seek out a third-party investor. There are a few things to take into account.

  • A rollover IRA gives you more investment options than a 401k. This may allow you to make different investments to fit your goals.
  • And, if you need to borrow from an IRA for an allowed method, you will be able to do so in more ways than if you were to have your money tucked into a 401k.
  • You will not have to pay fees in this method as long as you follow the IRS guidelines for timing the rollover. However, you may have to pay some taxes in some situations.

Understanding Options Before You Roll Over 401k To A New Employer

When it comes time to consider all of the options available to you, don’t do it alone. Work with an investor who can help you to select the best method for moving your retirement plan to a new provider.

Everyone needs a customized plan to address their long-term and short-term goals. You will want to learn what options are available so you can make the most of any money you put into a retirement account. Spending a few extra minutes doing this can help you to save substantially in the long term while also building a retirement account you can rely on in the future.

Learn more about IRAs with Atlantic Financial