401(k) rollovers, in plain English
Left a job? Your old 401(k) has four options.
Your 401(k) doesn’t follow you when you leave. The right move depends on fees, investment choices and how many accounts you want to keep track of. And one common mistake can cost you 20% up front.
- Leave it where it is
- Move it to your new employer’s plan
- Roll it to an IRA
- Cash it out
Your four options
Here’s how each one works, and who it tends to fit.
Leave it where it is
It’s the easiest choice because you don’t have to do anything. The catch is that out of sight tends to mean out of mind. Nobody rebalances it, fees keep coming out, and two or three old plans make it hard to see your whole picture.
Good fit if: your old plan has low fees and good choices, and you’ll actually keep an eye on it.
Move it to your new plan
If your new job’s 401(k) accepts rollovers, you go from two accounts to one. You’re limited to that plan’s investment menu and rules, so check the fees and choices first.
Good fit if: your new plan is strong and you want things simple.
Roll it to an IRA
An IRA is an account you own and control. It usually gives you the widest choice of investments and lets you combine several old plans in one place. Done as a direct rollover, the move itself isn’t taxed.
Good fit if: you want more control, more choices, or one account for several old plans.
Cash it out
The withdrawal is taxed as income. Under 59½, you may owe an extra 10% penalty, with a few exceptions. The plan also holds back 20% for federal taxes before you see a dime.
Good fit if: almost never. If you need the money, talk to someone first.
IRAs and 401(k)s have different rules on creditor protection, early withdrawals and employer stock. Florida law generally gives IRAs strong protection, but if any of those matter to you, ask your attorney or tax professional before you move.
Read this before you move anything
The mistake that costs people 20%
There are two ways to move a 401(k). Only one of them keeps all your money working.
Direct rollover
The money goes straight from your old plan to the new account. Nothing is withheld and you never touch it. This is usually the way to go.
Indirect rollover
The plan mails you a check minus 20% withheld for taxes. You then have 60 days to deposit the full amount, including the 20% you never got, or the shortfall counts as a withdrawal.
If you’re moving money, ask for a direct rollover by name. Moving an IRA you already have? See IRA Rollovers and Transfers.
Where we fit in
We’re a fee-only fiduciary, so we’re required to put your interests first, and we don’t earn commissions on anything we recommend.
If you choose to roll your 401(k) into an IRA we manage, we’re paid our advisory fee for that work. Our recommendation is based on what’s best for you, and sometimes that means leaving your money right where it is.
- Fee-only, so we do better when you do better
- A fiduciary, required to act in your best interest
Keep reading
A few more pieces people read after this one.
Want the bigger picture?
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This page is general education, not individualized investment, tax or legal advice. All investing involves risk, including loss of principal. We do not prepare taxes or give tax advice; talk with your tax professional about how a rollover affects your taxes.
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