How to Roll Over Your 401(k) to a New Employer’s Plan

Quick answer

• You can usually roll over your 401(k) to a new employer’s plan or an IRA.
• Review your new plan’s options and fees before deciding.
• Understand the difference between a direct and indirect rollover.
• Keep track of paperwork and deadlines to avoid penalties.
• Consider consulting a financial advisor for personalized guidance.

What to check first (before you invest)

Before you decide where to move your 401(k) funds, take a moment to assess your personal financial situation and the options available to you.

Time Horizon

Your investment time horizon is the length of time you expect to keep your money invested before you need to access it. For long-term goals like retirement, a longer time horizon generally allows for more aggressive investment strategies. If you anticipate needing the funds sooner, a more conservative approach might be appropriate.

Risk Tolerance

This refers to your comfort level with potential fluctuations in your investment’s value. Are you comfortable with the possibility of short-term losses for the potential of higher long-term gains, or do you prefer stability even if it means lower growth? Your risk tolerance should align with your investment choices.

Emergency Fund

Before investing, ensure you have a solid emergency fund. This is a readily accessible stash of money, typically in a savings account, covering 3-6 months of essential living expenses. This fund prevents you from needing to tap into your retirement savings during unexpected events like job loss or medical emergencies.

Fees and Tax Impact

Understand all fees associated with your current 401(k) and any new plan you’re considering. This includes administrative fees, investment management fees, and potential transaction costs. Also, be aware of the tax implications of different rollover options. Generally, rollovers to another qualified plan or an IRA are tax-deferred, but mistakes can lead to taxes and penalties.

Account Type

Your primary decision will be whether to roll your 401(k) into your new employer’s plan or into an Individual Retirement Arrangement (IRA). Each has its own advantages and disadvantages regarding investment options, fees, and flexibility.

Step-by-step (simple workflow)

Transferring your 401(k) can seem complex, but following these steps can make the process smoother.

1. Review your old 401(k) plan documents:

• What to do: Gather statements and plan summaries from your previous employer. Note your vested balance, any outstanding loans, and withdrawal options.
• What “good” looks like: You have a clear understanding of your current holdings and any restrictions.
• Common mistake and how to avoid it: Assuming you know your vested balance. Always confirm the exact amount you are entitled to keep.

2. Research your new employer’s 401(k) plan:

• What to do: Obtain the plan documents, investment options, and fee schedule from your new employer’s HR department or plan administrator.
• What “good” looks like: You have a comprehensive list of available investments, their expense ratios, and administrative costs.
• Common mistake and how to avoid it: Not comparing fees. Higher fees can significantly erode your returns over time.

3. Compare your options:

• What to do: Weigh the investment choices, fees, and features of your old 401(k) against your new employer’s plan and consider an IRA.
• What “good” looks like: You’ve identified the option that best suits your investment goals and risk tolerance.
• Common mistake and how to avoid it: Sticking with the default option without comparison. Take the time to evaluate what’s truly best for you.

4. Decide on your destination:

• What to do: Choose whether to roll over into the new employer’s plan, an IRA, or, in some cases, leave the money in your old plan (if allowed and the balance meets minimums).
• What “good” looks like: You’ve made a confident decision based on your research.
• Common mistake and how to avoid it: Procrastinating the decision. Leaving funds in an old plan without active management can lead to neglect.

5. Initiate the rollover:

• What to do: Contact your old 401(k) plan administrator to request a rollover. Specify whether you want a direct rollover (funds go from one custodian to another) or an indirect rollover (funds are sent to you).
• What “good” looks like: The administrator provides the necessary forms and guidance for the rollover process.
• Common mistake and how to avoid it: Requesting an indirect rollover and not reinvesting within the 60-day window. This can trigger taxes and penalties.

6. Choose the rollover type (Direct vs. Indirect):

• What to do: For most people, a direct rollover is recommended. The funds are sent directly from your old plan administrator to your new plan administrator or IRA custodian. For an indirect rollover, the funds are sent to you, and you have 60 days to deposit them into a new qualified account.
• What “good” looks like: You understand the implications of each and choose the one that minimizes tax and penalty risks.
• Common mistake and how to avoid it: Forgetting the 60-day deadline for indirect rollovers. This is a critical window to avoid adverse tax consequences.

7. Complete the paperwork:

• What to do: Fill out all required forms accurately for both your old plan administrator and your new plan administrator or IRA custodian.
• What “good” looks like: All fields are completed correctly, and you have copies of everything for your records.
• Common mistake and how to avoid it: Incomplete or inaccurate information. This can cause significant delays or even rejection of the rollover.

8. Monitor the transfer:

• What to do: Track the progress of the funds moving from your old account to your new one.
• What “good” looks like: The funds are transferred within the expected timeframe, and your new account statement reflects the new balance.
• Common mistake and how to avoid it: Assuming the transfer is complete without verification. Double-check your new account statement.

9. Invest the funds in your new account:

• What to do: Once the money has arrived, select your desired investments within your new 401(k) or IRA.
• What “good” looks like: You’ve chosen investments that align with your retirement goals and risk tolerance.
• Common mistake and how to avoid it: Leaving the money in a cash or money market fund indefinitely. This forfeits potential growth.

Risk and diversification (plain language)

Investing involves risk, and diversification is your primary tool to manage it. Think of it as not putting all your eggs in one basket.

• Don’t put all your eggs in one basket: Investing in different types of assets (like stocks, bonds, and real estate) means that if one type performs poorly, others might do well, smoothing out your overall returns.
• Stocks vs. Bonds: Stocks represent ownership in companies and have higher growth potential but also higher risk. Bonds are loans to governments or corporations, generally offering lower returns but with less volatility.
• Asset Allocation: This is the mix of stocks, bonds, and other investments in your portfolio. It’s a key driver of your investment’s risk and return.
• Diversification within asset classes: Even within stocks, you can diversify by investing in companies of different sizes (large-cap, mid-cap, small-cap), in different industries (tech, healthcare, energy), and in different geographic regions (U.S., international).
• Mutual Funds and ETFs: These are pooled investment vehicles that hold many different securities, offering instant diversification. They are a popular way to achieve broad market exposure.
• Rebalancing: Over time, your asset allocation can drift as some investments grow faster than others. Rebalancing means selling some of the winners and buying more of the underperformers to bring your portfolio back to your target allocation.
• Long-term perspective: Investing for retirement is a marathon, not a sprint. Short-term market swings are normal.
• Dollar-Cost Averaging: Investing a fixed amount of money at regular intervals, regardless of market conditions, can help reduce the risk of investing a large sum at a market peak.

During market drops, it’s natural to feel anxious. However, remember that market downturns are a normal part of investing. For long-term investors, these periods can present opportunities to buy assets at lower prices. Resist the urge to panic sell. Instead, review your investment strategy and consider if any adjustments are needed, but often, the best course of action is to stay the course.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
<strong>Not initiating the rollover quickly</strong>	Funds remain in an old, potentially higher-fee plan or become forgotten.	Contact your old plan administrator immediately to start the process.
<strong>Choosing an indirect rollover blindly</strong>	Risk of missing the 60-day reinvestment deadline, triggering taxes and penalties.	Opt for a direct rollover whenever possible. If indirect, set calendar reminders for the deadline.
<strong>Ignoring fees in the new plan</strong>	Reduced investment growth due to higher administrative and fund expenses.	Thoroughly review the new plan’s fee schedule and compare expense ratios of available funds.
<strong>Not comparing investment options</strong>	Missing out on better-performing or lower-cost investment choices.	Actively compare the investment lineup of your new plan against your old one and consider IRA options if they are superior.
<strong>Leaving funds in cash after rollover</strong>	Loss of potential growth and purchasing power due to inflation.	Select appropriate investments that align with your risk tolerance and retirement timeline as soon as funds arrive.
<strong>Incorrectly filling out paperwork</strong>	Significant delays, rejection of the rollover, or incorrect tax reporting.	Read all instructions carefully, double-check all information, and ask for clarification if unsure. Keep copies of all documents.
<strong>Not verifying the transfer completion</strong>	Funds might be lost or misplaced if the transfer isn’t confirmed.	Always check your new account statement to ensure the full balance has been transferred accurately.
<strong>Forgetting about outstanding loans</strong>	If not handled properly, a 401(k) loan can become a taxable distribution.	Understand the rules for handling 401(k) loans during a rollover; often, you must repay it or it’s treated as a withdrawal.
<strong>Not understanding the difference between Roth and Traditional rollovers</strong>	Potential for unexpected taxes if Roth funds are rolled into a Traditional account.	Ensure you maintain the Roth designation if rolling over Roth 401(k) funds to a Roth IRA or Roth 401(k).

Decision rules (simple if/then)

• If your new employer’s 401(k) plan has significantly lower fees and better investment options than your old plan, then roll over your 401(k) to the new plan because it can lead to better long-term growth.
• If your new employer’s plan has limited or poor-performing investment choices, then consider rolling over to an IRA because you’ll have access to a much wider selection of investments.
• If you have a Roth 401(k), then roll it over to a Roth IRA or a Roth 401(k) at your new employer to maintain its tax-free growth status because mixing Roth and Traditional funds can complicate taxes.
• If you are close to retirement and don’t want to manage new investments, then leaving your 401(k) with the old provider might be an option, provided the fees are reasonable and investment choices are acceptable, but check if your old plan allows this.
• If you are unsure about investment choices in the new plan, then roll over to an IRA and consult with a financial advisor because an IRA offers more flexibility and professional guidance.
• If you need immediate access to funds and have no other options, then consider taking a distribution from your 401(k), but be aware of the significant tax and penalty implications because it’s generally not advisable for retirement savings.
• If your old 401(k) has unique features or investments you can’t replicate elsewhere, then evaluate if leaving it with the old provider makes sense, but be mindful of potential fees and lack of oversight.
• If you have multiple old 401(k) accounts from previous employers, then consolidating them into one IRA or your current employer’s plan can simplify management and potentially reduce fees because fewer accounts mean less paperwork and easier tracking.
• If you are self-employed or your new employer doesn’t offer a 401(k), then rolling over to an IRA is your primary option for tax-advantaged retirement savings.
• If you are considering a direct rollover, then ensure you have the correct account numbers and custodian information for both your old and new accounts because accuracy is crucial for a smooth transfer.

FAQ

Q: Can I roll over my 401(k) if I’m still employed by that company?

A: Generally, you can only roll over your 401(k) once you leave the employer sponsoring the plan, unless your plan specifically allows “in-service” rollovers for certain age groups or balances.

Q: What is the difference between a direct and indirect rollover?

A: In a direct rollover, funds are sent from your old 401(k) administrator directly to your new plan administrator or IRA custodian. In an indirect rollover, the funds are sent to you, and you must deposit them into a new retirement account within 60 days to avoid taxes and penalties.

Q: What happens if I don’t complete the rollover within 60 days for an indirect rollover?

A: If you miss the 60-day deadline, the distribution will be considered a taxable withdrawal. You will owe income tax on the amount, and if you are under age 59½, you will likely also face a 10% early withdrawal penalty from the IRS.

Q: Can I roll over a loan from my 401(k)?

A: You cannot directly roll over a 401(k) loan. If you leave your employer, you typically have a limited time to repay the outstanding loan balance. If you don’t repay it, it will be treated as a taxable distribution and may be subject to a 10% penalty.

Q: What are the benefits of rolling over to an IRA instead of my new employer’s 401(k)?

A: IRAs often offer a wider range of investment choices, potentially lower fees, and more flexibility in managing your retirement assets. However, they don’t have the same creditor protections as 401(k)s in some situations.

Q: What happens to my Roth 401(k) funds during a rollover?

A: You should roll over Roth 401(k) funds into a Roth IRA or a Roth 401(k) at your new employer to maintain their tax-free status. Rolling Roth funds into a Traditional account will convert them to pre-tax money, which can have tax implications.

Q: Do I have to pay taxes when I roll over my 401(k)?

A: No, as long as you complete a direct rollover or a timely indirect rollover into another qualified retirement account, you will not owe taxes on the transfer itself. Taxes are deferred until you withdraw the money in retirement.

What this page does NOT cover (and where to go next)

This guide provides a general overview of transferring your 401(k). For specific advice, consider exploring these related topics:

• Detailed comparison of IRA providers: Researching specific brokerage firms or financial institutions for your IRA.
• Advanced investment strategies: Learning about more complex investment vehicles and portfolio management techniques.
• Retirement income planning: Understanding how to draw income from your retirement accounts in retirement.
• Estate planning for retirement accounts: Planning for how your retirement assets will be distributed after your death.
• Tax implications of early withdrawals: Understanding the rules and penalties for taking money out before retirement age.