Changing Jobs? Moving Your 401(k) In A Smart Way

Many workers face the challenge of moving to a different job.  One of the aspects which make it difficult is how to handle the retirement plan you have or already had.  Here are the different possibilities to consider and what is involved:

1) Moving the 401k (403b if in the public sector) into a Rollover IRA -  There are quite a few advantages to this option.  First, there are more investment possibilities and choices in a Rollover IRA.  Specifically, most 401ks limit you to a constrained number of mutual funds. An individual retirement account (IRA) offers the choice of individual stocks, bonds, index funds, exchange traded funds, and a broad array of diversified mutual fund families. You are able to get customized investments which fit your specific needs and time horizon.  There are fewer and easier to understand rules regarding an IRA.  Once moved into a Rollover IRA, it can then be moved again into a Roth IRA, which could potentially help your tax situation.  Finally, as you consider your beneficiaries, a Rollover IRA may prove better for their situation. 

2) Moving the Old 401K into the New company 401K plan - This is typically the easiest option.  You contact the human resources department of the old company.  Once you have the new 401K plan set up, talk to your new human resources department about how to go about moving the assets from the old plan to the new account.  It typically involves a transfer form from the custodian where the new 401k plan resides.  The biggest question to consider is do you like the investment options in the old plan.  If you do, then this is the simplest option.  If you do not, then a Rollover IRA probably offers more choices. 

‍3) Cashing it Out and Paying the Taxes and Withdrawal Penalty - This alternative is there if you are unconcerned about losing money from taxes and a withdrawal penalty.  The tax rate will depend on your personal income tax rate.  The withdrawal penalty is going to be 10% on the amount withdrawn if you are under the age of 59 and ½.  It becomes pretty clear that the asset value in the account and your personal situation is going to play the biggest role in determining if this is a good option.  If you need money quickly because of an unforeseen life event, it is an option, but certainly it is not ideal.  The other issue is that a 401k plan is designed to help you save for retirement, not provide you with immediate cash.  By cashing out, you defeat the purpose of the saving for retirement.

‍4) Leaving it in the Old 401K plan- In this alternative, you simply leave the assets in the old employer 401k plan.  There are issues to consider with this choice.  First, above all, what restrictions the old employer has in place for allowing this.  Second, on any amount less than $5,000, the old company is permitted to cash out the plan and send you a check.  In that situation, you will owe taxes on the withdrawal plus a penalty of 10%.

In sum, the choices for moving an old 401k plan to a new place are not that complex.  It depends on your specific circumstances and what choice makes the most sense for you.  If you need help with moving a 401k plan, please visit this page.