Changing Jobs: 401K Rollover

When leaving a Company, what’s the best way to approach your 401k plan?

 

I recently left a job and had a balance built up in the Company 401k plan. I’ve always made it a point to move my 401k balances to my rollover IRA accounts relatively quickly after leaving a Company.

 

My rollover experience this time around was probably the easiest I’ve ever had - it was a couple of minutes on the phone, and no real tough questions. It was all pretty simple.

 

When you leave a Company, you have a few options:

  • If your balance is over the plan minimum to keep it in the 401k after separation, you can leave it in your former Company’s 401k plan. In many instances, this is somewhere between $2,000 and $5,000. It’s dependent on the plan documents of the 401k plan - so make sure you know what the minimum is to keep the balance with your former employer. Otherwise a random check might show up…. and that can lead to tax consequences….
  • You can roll over your old 401k plan to the plan with your new employer (subject to plan terms). If your new employer has a good plan, with low cost investment options, this might be a good option - especially if your balance is relatively small in your prior plan.  It keeps everything one one place.
  • You can roll over your balances to a rollover IRA account. This may be a great option, and gives you more flexibility in your investment choices. A question you need to wrestle with here is whether you should work with an advisor or do it on your own. If you don’t feel confident in your skills, and don’t have the requisite experience/ knowledge, working with an advisor may be an appropriate approach. Whatever you decide to do, keep your fees low. High fees eat into your nest egg and your returns take a hit over time.

BAD OPTION: You could cash out your balance and take the cash. Know that you face tax penalties if you go down this route unless you are retired. We DO NOT recommend this option. It is not good for your financial future.

 

Given that many people change employers relatively frequently your best options may be to roll your balances into an IRA account - or to your new employers plan if it means that you can better keep track of what you have, and to simplify your record keeping.

 

If you have your 401k balance spread between a traditional 401k and a ROTH 401k, be aware that you will need to roll the balances into both a rollover traditional IRA and a rollover ROTH IRA. If you have a ROTH balance, you will want to know how much of the balance was a contribution vs what is growth/ appreciation.

 

When you initiate your rollover transactions, make sure that the funds get deposited to the rollover instrument of choice promptly. There are tax penalties if you do not complete the deposits to your new accounts quickly. Also, be aware you will get tax forms generated for your rollover amounts. Providing that you have promptly ensured the funds are deposited to your rollover option, you don’t have anything to worry. If, however, you chose to keep funds and don’t deposit them, you will have to pay taxes & penalties. You don’t want that.

 

If you have an account with relatively low balances - it may be easier to roll it into a 401k plan at your new employer until you build up a little more the next time you leave a job.

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