How to Transfer a 401(k) to a New Job

Rolling Over Your 401(k): An Overview

If you’re switching employers, you will need to decide what to do with the money that you have invested in your current company’s 401(k) plan.

You can leave your money where it is. You can also roll the money over to a new employer’s plan, if the employer allows it, or you can put it into an individual retirement account (IRA).

In any case, do it the right way or you could wind up owing income taxes and penalties on the balance.

Compare Company Plans

Take the time to compare your old and new plans. In a pinch, you can leave the money where it is until you decide.

Compare each plan’s historic investment returns and the expenses that its investors are charged. Take a look at the investing options that the new plan offers. This decision is up to the employer, and may not include the kind of investments you want.

Most employers have dedicated personnel who can answer questions regarding the 401(k) plan. You can also contact the plan administrator’s helpline for details.

Move Money to New Employer’s 401(k)

You have the option to keep your money where it is. There’s no penalty for hanging onto the account.

You could lose some perks, though. Your new retirement plan will start at a zero balance. That’s not helpful if you want to take a loan out. Moreover, it’s just easier to keep an eye on one account than to juggle two of them.

Roadblocks to Rollovers

If you have at least $5,000 in your account, most companies allow you to roll it over. But, an account with a balance of less than $5,000 can be rolled out of the plan by the company if a former employee does not respond to a notification letter within 30 days.

If the account balance is under $1,000, federal regulations allow companies to send you a check, triggering federal and state income if applicable plus a 10% early withdrawal penalty if you are under age 59½.

In either scenario, taxes and a potential penalty can be avoided if you roll over the funds into another retirement plan within 60 days of leaving the job.

The Right Ways to Do a 401(k) Rollover

If you decide to roll over an old account, contact the 401(k) administrator at your new company for a new account address, such as “ABC 401(k) Plan FBO for the benefit of (Your Name).”

Contact your former employer with this information and the money will be transferred directly from your old plan to the new plan or sent by check to you (made out to the new account address), which you will give to your new company’s 401(k) administrator. This is called a direct rollover. It’s simple and transfers the entire balance without taxes or penalties.

Your Safest Choice

Your best option is to have that money transferred directly from your old account to your new account. Avoid touching that money or you could owe the IRS the income taxes due on the entire balance.

The safest option is a direct trustee-to-trustee transfer. The process is completed electronically. You never see a check, and your personal bank account is not involved.

The Indirect Option

A somewhat riskier method is the indirect or 60-day rollover. You can ask your old employer to send you a check made out to your name.

This manual method has the drawback of mandatory tax withholding. The company assumes you are cashing out the account and is required to withhold 20% of the funds for federal taxes. A $100,000 nest egg becomes a check for $80,000, even if your clear intent is to move the money into another plan.

You then have 60 days to deposit the money in your new company’s 401(k) plan. If you blow the deadline, you could owe taxes on the entire amount plus a 10% early withdrawal penalty.

Even so, that withheld $20,000 must also be paid into your account from some other source. If not, it must be reported on your tax return and could push you into a higher tax bracket.

Tax Implications

All 401(k) distributions must be reported on the recipient’s tax return, in any case. The old plan administrator should issue you a Form 1099-R.

For example, you request a full distribution to rollover from your 401(k), which has a balance of $55,000. Using a direct rollover, $55,000 transfers from your plan at your old job to the one at your new job.

If the payment is made to you in the indirect rollover, $11,000 is withheld for federal taxes, and you receive a check for $44,000. For this distribution to be completely tax-deferred, you must deposit the $44,000 from the 401(k) and $11,000 from another source into a qualifying plan within 60 days.

Rollover Exceptions

There are a few exceptions where part of the balance of a 401(k) may not be eligible for rollovers. These include:

Roll Over 401(k) Into an IRA

Say your new employer’s plan has lousy investment options, or it doesn’t even offer a 401(k). Or, you might be going out on your own as a self-employed person.

You can roll over a 401(k) to an IRA. This rollover can also be a direct trustee-to-trustee transfer or a payment directly to you with a 60-day deadline for depositing it into an IRA.

This frees you of any limitations that a new employer’s plan may have. You have a virtually unlimited range of IRAs to choose from. They can be opened through just about any bank, brokerage, or financial services company.

The Bottom Line

The big challenge in transferring your 401(k) balance to a new employer is avoiding triggering income taxes and penalties on the money. If it looks like an early withdrawal, you’re sunk.

Your safest choice is to transfer the money directly from your old account to the new account. You can have the balance deposited in your personal bank account but, if you do, beware the 60-day rule. Transfer that money into another retirement account pronto or the IRS will treat it as income for the year.