Understanding Your 401k Rollover Options

If you are in the process of changing jobs or retiring you'll want to consider your 401k rollover options.

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If you’ve left a job where you had a 401k, you might consider rolling over your 401k into an account that you can have more control over. You generally don’t have the ability to move your 401k without incurring a penalty, but once you change jobs you have the flexibility to move your 401k without paying penalties and taxes as long as you move the 401k within a certain period of time.

A 401k rollover lets you move the money in your retirement account into another one, perhaps one that you like better.

Your New Employer’s Qualified Plan

If your new employer has a 401k or 403b – a 403b plan is a retirement savings for some non-profit employers and schools – you may be able to transfer your previous 401k savings into a plan offered by your current employer. If you decide to rollover into a new 401k you won’t be able to touch the money without penalty unless you take out a loan or you change employers again.

Different employer plans have different 401k contribution rules. Your new employer’s 401k retirement plan may not allow you to transfer money into your account or there may be a minimum investment amount that prevents you from transferring your money if you don’t have enough. Before you initiate the rollover process, check with your new employer’s retirement plan administrator to learn whether there are any limitations on 401k rollovers.

If you’re now self-employed, you may rollover your 401k into an Individual 401k, a retirement option for self-employed individuals. You can open an Individual 401k if you are self-employed with no employees, even if your business is incorporated.

Rollover Into an IRA

You can move your retirement savings into an IRA, Individual Retirement Account. IRAs allow you to continue to contribute tax-deferred money for retirement and they give you more choices for investing than your employer’s 401k retirement plan. You can rollover a 401k into a traditional IRA, Roth IRA, or SEP-IRA. Note that if you rollover into a Roth IRA, you won’t be able to rollover those same funds into a different employer-sponsored retirement plan.

Keep in mind that if you make a IRA rollover, you won’t be able to access the funds via loan as you could with a 401k. Your only option, if you have no choice but to tap into retirement savings, is to take a 401k plan withdrawal and pay the penalty and taxes.

401k Time Limit

To avoid penalties, it may be best to transfer your 401k savings directly into your new retirement plan. Otherwise,if you plan to do an indirect 401k rollover – where you get
a check for the balance of your 401k that you can deposit into your new account – you have 60 days to make deposit the check into your new retirement plan. Otherwise, you face the early withdrawal penalty.

Rolling Over With a 401k Plan Loan

If you left your previous company with a 401k plan loan, you may be required to pay the balance of the loan in full before you can rollover the rest of your 401k savings.
Unfortunately, if you can’t afford to repay the loan, the amount you borrowed will be treated as a withdrawal and you’ll face early withdrawal penalty. This will reduce the amount you’re able to rollover into a new plan.

Is a 401k Rollover Required?

You don’t have to rollover your 401k after you leave your employer. Instead, you can cash out your 401k. Your employer will send you a check for the balance of your 401k minus a 20% mandatory penalty imposed by the IRS if you receive the 401k distribution before you turn 59 ½. You also have to report the 401k distribution as taxable income and pay an additional penalty.

Alternatively, you can leave your 401k right where it is, especially if your ex-employer’s retirement plan had lower fees than an IRA or your new employer’s retirement plan. You might also leave your 401k if you prefer the smaller number of investment options offered by your old employer’s plan.