Moving a 401(k) from one job to another: A Steps-by-Step Guide

Rockin' Through Your 401(k): A Lively Guide

Moving a 401(k) from one job to another: A Steps-by-Step Guide

So, you've landed a new gig, and now you're questioning what to do with your hard-earned cash stored in your current company's 401(k) plan.

You've got options galore! You can keep your dough where it's at, transfer it to a sparkling new employer's plan, or pop it into an individual retirement account (IRA)––the choice is all yours! Just remember, do it the right way, or Uncle Sam might come knocking for his cut!

Key Takeaways

• Compare your old and new 401(k) plans to make an informed decision.
• If the new plan ain't up to snuff, switch that balance to an IRA for more investment freedom.
• In most instances, it's cool to leave your account in its current state, but beware of missing out on perks like loans.

Comparing Your Retirement Plans

Before you make a move, take a thorough gander at both your old and new plans, chickadee. In a pinch, you can kick back until you worry about those details.

Compare each plan's historical investment returns, the fees their investors cough up, and the various investments the new plan offers. Keep in mind that these choices are primarily the employer's call, and it might not have the investments you fancy.

Most employers have dedicated folks on hand to answer your 401(k) questions. You can also reach out to the plan help-line administrator for the deets, bub.

Moving Money to Your New Employer's 401(k)

You always have the option to leave your money right where it is. No penalties, ain't we sweet? But you might miss out on some cool perks.

For instance, your brand-new retirement plan starts with a zero balance. That's not a boon if you jones for a loan. It's just simpler to manage one account rather than juggle two, too.

Important

Be advised, federal regulations necessitate that your company rolls your balance into an IRA if it holds between $1,000 and $5,000 and forces you out of the plan.

Roadblocks to Rollovers

If you've got at least $5,000 in your account, many companies let you transfer it. However, for accounts with balances lower than $5,000, your company can offload the plan if you don't address a notification letter within the next 30 days.

If your account balance is less than $1,000, federal rules give your company the liberty to send you a check, which may trigger federal and state income taxes as well as a 10% early withdrawal penalty if you're under 59½.

Bear in mind, taxes and penalties can be evaded if you roll over your funds into another retirement plan within 60 days of leaving your gig.

Executing a 401(k) Rollover the Right Way

If you decide to transfer that old money, reach out to your new company's 401(k) administrator for a new account address, like "ABC 401(k) Plan FBO for the benefit of (Your Name)."

Drop your former employer a line with this information, and, poof!, the money will be shifted directly from your old plan to your new plan or sent to you in a check (payable to the new account address). That's called a direct rollover, and it's a breeze!

Your Best Bet

The top dog on the block is a direct trustee-to-trustee transfer. This happens electronically, giving you zero face time with your cash. Plus, your personal bank account is nowhere near the equation.

Alternative Option

There's a somewhat riskier method called the indirect or 60-day rollover. You can ask your old employer to send you a check, and then, within 60 days, transfer it to your new company's 401(k) plan.

Taxes are baked into this method because the company assumes you're cashing out the account. They're required to withhold 20% for Uncle Sam's taxes. If you've got a $100,000 batch, for instance, what you get in the mail is a check for $80,000, even though your intention of the move is crystal clear.

You have 60 days to shove the money into your new company's 401(k) plan. If you miss the deadline, you could face a tussle with the IRS and a penalty.

To top it off, the withheld $20,000 (in our example above) needs to be replenished. If it isn't, it needs to be reported on your tax return and might bump you into a higher tax bracket.

Tax Implications

All 401(k) distributions need to be declared on your tax return. Your old plan administrator should cut you a break with a Form 1099-R.

Savvy Suggestion

Not all companies are open to rolling over your old 401(k) into their plan. It's a good idea to double-check with the new company plan administrator to see if that's the case. If so, a direct rollover to an IRA could be your best bet.

Rollover Exceptions

There are a few scenarios where part of the balance in a 401(k) may not be eligible for a rollover. These cases include:

• Required minimum distributions (RMDs) if you are 73 or older
• Loans treated as a distribution
• Hardship distributions
• Distributions of excess contributions and related earnings
• A distribution that is one of a series of substantially equal payments
• Withdrawals electing out of automatic contribution arrangements
• Distributions to pay for accident, health, or life insurance
• Dividends on employer securities
• S corporation allocations treated as deemed distributions

Roll Over 401(k) Into an IRA

Maybe your new employer's plan isn't up to par, or it doesn't even come with a 401(k). Or, you might be embarking on the wild ride of becoming self-employed.

You can roll over a 401(k) into an IRA. This rollover can also be a direct trustee-to-trustee transfer or receive the payment directly into your pocket within 60 days for a deposit into your IRA.

This provides limitless options for IRAs––you can open accounts at just about any bank or brokerage or financial services company.

Do I Have to Roll Over My 401(k)?

Nope, you don't need to roll over your 401(k) to your new employer's 401(k). You can leave the money where it's at if there's $5,000 in the account, or you can transfer it to a new 401(k) plan or an individual retirement account (IRA).

How Long Do I Have to Roll Over a 401(k)?

There are no hard-and-fast rules on how swiftly you need to roll over your 401(k). In the event your account balance is less than $5,000, your previous plan may demand that the money move.

What If My New 401(k) Plan Sucks Frog Knuckles?

If the investment options in your new employer's 401(k) plan are subpar, you've got several options. You can stick it out and leave the money where it is, or you can transfer it to an IRA for more flexibility.

Of course, you now have another decision to ponder. If your new plan is a dog's breakfast, and your employer offers zilch in terms of matching contributions, you could opt to put your newly-earned retirement savings into your new IRA or a separate IRA.

The Bottom Line

Navigating the transfer of your 401(k) balance to a new account can be a tricky business. The big hitch here is avoiding those pesky income taxes on the funds. Keep it movin', direct, and fast, and you'll come out on top!

1. If the new 401(k) plan does not offer favorable investments or does not meet your personal-finance goals, you might consider rolling over the balance into an IRA for more investment freedom.
2. In the world of decentralized finance (defi), regulation around virtual assets like 401(k) rollovers is crucial. Ensure you're following the proper steps to avoid any potential financial and legal repercussions.

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