Land a New Job? Here's How to Roll Over a 401(k) from an Old Employer

Andrew Weber is a senior director of Planning Philosophy, Research and Guidance at Northwestern Mutual. 

Getting a new job creates excitement and new possibilities for growth. Whether you’re moving to a position you’re more passionate about, getting more money, or both this is likely an exciting time. No matter what your new role looks like, you’re likely also going to be making some financial decisions during the transition. One key decision you’ll need to consider is whether you want to roll over your 401(k).

Think about how much you contributed to your company’s 401(k) retirement savings plan. You worked hard for that money, and chances are your employer kicked in matching dollars to help boost what you currently have in your 401(k) account. Depending on how many years you worked at your job, you may have accumulated a sizable amount of retirement savings.

While you can typically leave your money in your old employer’s 401(k), many people take the money with them, which is known as rolling over your 401(k). You could roll the funds into your new employer’s 401(k) or to an individual account, like an IRA.

Here’s what to know about rolling over your 401(k).

Choose a destination account for your 401(k) funds.

Most employer-sponsored 401(k) plans are portable. So, you have choices about what to do with this money. Because a 401(k) has favorable tax treatment, the rollover process isn’t quite as simple as getting cut a check. But don’t worry; it’s pretty easy. You’ll just want to make sure you do it correctly to avoid triggering unnecessary and costly withholding taxes, penalties or fees on the transaction. Here are some of your options.

Take your old 401(k) to your new job

If your new employer accepts rollovers (not all plans do) and you like the choice of investments, you can take your funds to the new plan. If you are a hands-off kind of investor, this might be a good option. Within an employer’s 401(k) plan, you are limited to a selection of investments that were likely vetted for quality by financial pros or your company’s 401(k)-investment committee.

Open your own retirement account

If you’re a little more hands-on, or you don’t like what’s offered in your new employer’s plan, you can roll that 401(k) into an IRA or Roth IRA. You’ll have a plethora of investment options to put your money into like stocks and bonds or mutual funds. And, given the range of options, you might find funds that have similar objectives with lower fees than what was offered in your 401(k) plan.

Roth or traditional IRA?

If you take a 401(k) and roll it over into a Roth IRA as opposed to a traditional IRA, the amount you roll over will be included in your taxable income in the year that you roll it over. However, any gains in a Roth IRA will be generally tax-free when you withdraw them years down the road in retirement.

If you want to completely avoid incurring taxes prior to retirement, roll your 401(k) into a traditional IRA. Similarly, if you are rolling over a Roth 401(k) into a Roth IRA, you don’t need to worry about a tax hit. If you want to avoid paying taxes, make sure you are moving money into the same kind of account (e.g., 401(k) to traditional IRA and Roth 401(k) to Roth IRA).

Why choose a direct rollover instead of an indirect rollover?

When it comes to actually rolling over your 401(k) money, you have two options—one of which tends to be much easier. 

A direct rollover

With a direct rollover, money is transferred directly from your old account to the new one. These two words are very important, because with a direct rollover your old 401(k) provider will write a check to your new plan provider not to you personally. Your old provider will write a check addressed to “ACME (your company) 401(k) PLAN FBO (for the benefit of) YOUR NAME.” While you might receive a check, you won’t be able to cash it at a bank. You’ll need to hand it over to your current 401(k) or IRA provider to add to your account.

If you’re trying to simply move your 401(k), a direct rollover is the easiest way to avoid any tax headaches.

An indirect rollover

With an indirect rollover, your 401(k) provider will make a check out to you in your name. Your old company will assume you are cashing out the 401(k) account and will need to withhold 20 percent of the funds for federal tax purposes. You’ll then have 60 days to invest the rest of that money into your new account or pay additional taxes and fees.

Regardless, that amount withheld by your old employer will need to be reported on your tax return, which might push you into a higher tax bracket. To avoid paying taxes, you can deposit an amount equal to the withholding in your new account, if you have the funds available. You would then get that withheld amount back when you file a tax return.

Consider other options for your 401(k) assets.

Rolling over your 401(k) is not necessarily the only option when considering what to do with that money. Here are some other options you might explore:

Roll your money into a variable annuity

Rather than an IRA, you could roll over all or a portion of your 401(k) into a variable annuity. Variable annuities are a hybrid of investments and insurance. You get a combination of tax-deferred growth potential for your money and you can take advantage of the guaranteed income an annuity can provide—typically when you get to retirement.

They’re variable because the return they provide as you’re accumulating funds for retirement can go up and down depending on the performance of underlying investment options—called subaccounts—that you select.

When you reach retirement, you could withdraw your funds all at once, over time, or convert them into an income plan that provides reliable income for the rest of your life.  Guaranteed income streams in retirement can help reduce your exposure to market volatility and help you manage longevity risk (outliving your savings). Talk with your advisor if you’re interested in this option.

Leave your money where it is

You can typically also leave your money in your old employer’s plan. If you are satisfied with the investments and don’t mind checking in on the account from time to time, this can be an easy, no-effort option. There are a few drawbacks, however.

When you leave your 401(k) behind, you won’t be able to contribute to the account anymore because you no longer work there. You’ll be limited to holding only the funds offered in that plan, and those investments may come with fees that dig into returns over time. What’s more, if you’ve changed jobs a few times during your career, you might have multiple 401(k) accounts floating around, and that can make managing your money difficult or lead you to forget about an account entirely.

Cash it out

Finally, you could cash out your old 401(k) and use the funds how you see fit. However, this option can cost you significantly. You’ll immediately pay income taxes on that lump sum along with an additional 10 percent penalty if you are younger than 59 1/2 (unless some other exception applies). Some accounts even charge a one-time closing fee if you go this route.

But remember, that’s just the hit you’ll take today. Over the long-run—a decade or more—you'll miss out on years of potential tax-deferred growth that could go a long way in retirement.

Plan to do more for your retirement savings

You worked hard to build your 401(k) account. But contributing to a 401(k) is just one thing you can do for your future—and you deserve more. With a financial expert in your corner, you can plan to enjoy today as you look forward to reaching your retirement goals. Connect with your advisor today to get started.

*This publication is not intended as legal or tax advice.  Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.

Guarantees in an annuity are backed solely by the claims-paying ability of the issuer. The underlying investment options are subject to market risk, including loss of principal, and are not guaranteed. No investment strategy can guarantee a profit or protect against a loss.  Variable contracts have limitations. You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest.  Refer to the Prospectus for details of all fees and charges.