How and Why to Roll Over a 401(k)
Last Updated: August 18, 2017
When you leave an employer, it is advisable that you take your 401(k) funds with you. This gives you a clean break from your former employer, not to mention lower fees and more control over your investment options if you choose to roll over to an Individual Retirement Account (IRA).
Why should I roll over my 401(k) to an IRA?
While you certainly can roll over your current employer-sponsored 401(k) to that of your new employer’s, it is probably in your best interest to open an IRA instead.
IRA’s have fewer fees than 401(k) accounts, as well as more opportunities for you to pick and choose your investments (e.g., via stocks, bonds, mutual funds).
This is not to say you should avoid setting up a 401(k) account with your new employer, as you do not want to miss out on the employer match. You’ll simply have two retirement accounts working for you – the IRA you rolled over from your former employer’s 401(k), as well as your new employer’s 401(k) account.
Should I close out my current 401(k) before opening a new one?
No. The last thing you want to do is have your 401(k) funds turned over directly to you.
Even if you immediately use the funds to open your new retirement account, the fact that you touched the money means the IRS will require the withholding of 20 percent of the funds. In order to get those funds back, you must file accordingly at tax time and wait for the funds with your return. You then have 60 days to return he funds to your new account, otherwise you will be taxed on it.
You’ll also be charged a 10 percent penalty fee for early distribution of the funds (unless you are at least 59 1/2 years old).
What steps should I take to roll over my 401(k)?
Before initiating changes to your 401(k) account:
- Make sure you know the details of your current 401(k), including how much is in the account, how much you have contributed, how much your employer has contributed, how much the fund has grown, and fees associated with the account.
- Decide which type of retirement account you want to roll over to. Again, you may roll over to your new employer’s 401(K), but an IRA is likely your best bet. Then it’s a matter of deciding between a traditional or Roth IRA.
- If you decide to go with an IRA, shop around for the best fees and investment options.
- Before closing out your old account, set up the new one first. Plan on scheduling a phone call with the custodian of your new account so they can walk you through the set-up process and smooth transfer of the funds.