Rolling Over Your 401(k)

Rolling Over Your 401(k)

You’ve been on the job hunt and came to a startling realization. If I left my current place of employment, what would happen to my 401(k)? First, you need to assess what your vested 401(k) will be.

The term “vested” in the 401(k) realm means the total amount of funds you can take with you when you leave the company.  Most people are unaware of their current employer’s 401(k) policies. I highly recommend finding this information out via human resources (HR) in order to evaluate how much of your 401(k) you can take with you.

Let’s say you have a new opportunity elsewhere, and now know what your vested 401(k) policies are. You have four options:

  1. Keeping your 401(k) where it’s at.
  2. Cashing out your 401(k).
  3. Rolling over your 401(k) to an IRA.
  4. Rolling over your 401(k) to your new employer’s 401(k).

Follow along for a more detail in this week’s blog post!

Keeping It Where It’s At

Not all employers allow you to keep your 401(k) in its current retirement account once you resign, but occasionally they do. There are more downsides to leaving your old 401(k) where it’s at, which is why I would shy away from this option.

If your vested 401(k) retirement account is less than $5,000, you might not have a choice. Some employers require you to take this money out, either rolled over or by check, whenever you leave the company. If you aren’t mindful and accept a check, this can lead to massive tax deductions from your previous employer’s 401(k).

Also, occasional retirement plans don’t allow you to withdraw partial amounts or contribute anymore to your former 401(k) retirement account once you resign. 

The only reason you might consider leaving your previous 401(k) retirement account as is, is if it has better investments than your new employer’s 401(k) plan. This will allow you to continue tax free compounding with better investment options.

Cashing Out

Cashing out your previous employer’s 401(k) is by far the worst option with ZERO benefits.

Withdrawing money from your 401(k) before 591/2 allows all pre-taxed contributions to succumb to federal income tax, state income tax (if your state has one), and a 10% IRA withdrawal penalty. Depending on where you live, you’ll only receive roughly 70% of your total 401(k) when withdrawn.

If you have less than $5,000 and are forced out, some employers have introduced automatic roll overs to traditional IRAs, avoiding all taxes and penalties. But again, some don’t and write checks instead. If you have less than $1,000 vested, then your employer is legally allowed to simply write a check and be done with it.

If you receive a check, immediately transfer this money into an IRA of your choice within 60 days. Unwillingness to do so will result in the 10% IRS withdrawal penalty.

Rolling Over to an IRA

If your new employer’s retirement plan permits, they can directly roll over your previous employer’s 401(k) account into your new company’s retirement account.

Direct rollovers are the quickest and easiest option for rolling over your 401(k). Money (or checks) never have to go through your hands, taking away the likeness you’ll forget about it and have to pay the hefty IRS penalty fee after 60 days.

There are two ways to go about this: directly rollover to a new IRA or to your new company’s 401(k). Which to choose?

Let’s start with rolling over into an IRA. In my opinion, I would avoid rolling over your 401(k) into a Roth IRA. You’ll have to pay federal and state (again, pending on your location) income taxes. If IRA is the route you choose, rollover your 401(k) into a traditional IRA instead.

You’ll have ZERO tax penalties, which is a huge plus, and have a multitude of quality and diverse investment options available in your IRA.

Keep in mind that you’ll now have to monitor two retirement accounts. The one you’ve just rolled over and your new employer’s 401(k).

Rolling Over to Your New Employer’s 401(k)

Now onto the latter, most popular option. If I were to rollover my previous employer’s 401(k), I would without question roll it into my new employer’s 401(k) plan.

The reason this option is more common than the one above is because it puts all your 401(k) savings into one localized account. However, there’s nothing wrong with using a traditional IRA. YOU have to decide what’s best for YOU.

Both the 401(k) and IRA have pros and cons. I believe people should utilize BOTH, diversifying their investment portfolios in the process.

Hope you all enjoyed this week’s blog post! If you have any questions regarding rolling over your 401(k), don’t hesitate to reach out. Also, if you’ve missed last week’s blog post on vetting your significant other via personal finance, click here!

As always, don’t forget to comment, like, share, and subscribe!

“Risk comes from not knowing what you’re doing.”


Book of the Month:       “The Book on Making Money” by Steve Oliverez

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