How to transfer 401(k) to a new job: 6 steps to move your savings with confidence

Navigating the landscape of personal finance and wealth management can be both exhilarating and challenging. Transitioning to a new job is a major moment on your financial journey. It holds a professional promise and significant implications for your 401(k) – an important part of your retirement strategy. 

But what should you do with your old 401(k) when you get a new job? Your options include rolling over your 401(k) contributions to your new job or to an IRA, cashing out, or leaving it put – just don't forget about it. 

In this guide, learn how to roll over your 401(k) to a new job, the advantages of transferring, as well as alternatives and considerations.

How to rollover your 401(k) to your new job: 6 steps 

Rolling over your 401(k) to your new job's retirement plan can be challenging at first, but it doesn't have to be. It’s typically called a rollover but it's really a simple (even if not easy) transfer from one financial institution to another. Plus, you're not changing the tax treatment of the account or the type like you would in an actual rollover. 

Here’s how to rollover a 401(k) in six steps: 

1. Consider your account options 

To start, you’ll want to understand your options. There are two different options: a traditional 401(k) and a Roth 401(k) and the key difference lies in how they are taxed: 

• Traditional 401(k): Contributions are made with pretax dollars, reducing your current taxable income, but withdrawals in retirement are taxed as ordinary income. 
• Roth 401(k): This is funded with after-tax dollars, so contributions don't reduce your current taxable income, but qualified withdrawals in retirement, including earnings, are tax-free, providing potential tax advantages for those anticipating higher tax rates.

There are also tax implications with transferring from one 401k account type to another. For example, if you transfer a traditional 401k account to a Roth IRA, a Roth IRA conversion will take place. This means that the total amount that you transfer to the new account will be added to your gross income for the tax year, thus increasing your overall income. 

2. Understand the 401(k) transfer rules

You should also consider transfer rules when it comes to direct and indirect rollovers. With a direct rollover, funds from your current 401(k) are transferred directly to your new employer’s 401(k) plan. This method is typically preferred because it avoids potential tax consequences and penalties. It is a seamless and tax-efficient way to move retirement savings when changing jobs or consolidating accounts. 

An indirect rollover is the liquidation of assets through the issuance of a check in the account holder's name by the current 401(k) administrator. The account holder must then deposit the money into a new 401(k) plan or IRA within 60 days. If you fail to transfer this deposit in less than 60 days, it’s considered an early withdrawal, and you’ll have to pay a penalty of 10% of the withdrawal amount, plus income taxes.

3. Review your new employer’s plan 

When learning how to rollover a 401(k), understand the new plan that your employer is offering. First, review and research the plan. Look at the documents they give you – this typically will include the Summary Plan Description (SPD) and the Investment Options. 

These guides will provide a detailed breakdown of how the plan works and the new benefits offered, such as 401(k) matching. 

4. Contact your current 401(k) provider

Then, contact your current 401(k) provider to initiate the rollover process. At this point in the process, you’ll let them know if you’d like to do an indirect or direct 401(k) transfer to your new employer. 

It’s important to note that your current employer may likely choose a 401(k) cash out of the investment if the amount is under $1,000 and send you a check rather than rolling it over. 

5. Complete rollover forms 

The next step is to complete rollover forms to ensure that your previous 401(k) gets transferred to your new job. To fill out these forms, you’ll likely need this information: 

• Personal identification details
• Account details for your current and new 401(k) plans, including account numbers
• Bank details
• Contact information for both plan providers

Once these are filled out, the funds are typically transferred to the new account within a week or two.

6. Review and adjust investments

Now that you’ve set up your new 401(k) and have begun to invest more funds, you can reassess your current asset allocation and ensure it aligns with your financial goals. This is a great time to create a financial plan to ensure you’re growing your investments and saving wisely. 

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Reasons you should transfer your 401(k)

Transferring your 401(k) to your new job is a smart financial move in various situations. Here are several reasons to transfer your 401(k) to your new job:

Easier to manage

When you narrow down the number of retirement accounts you have, they become much easier to manage since they can simplify tracking your investments and contributions. Handling communications with a single 401(k) plan provider versus multiple IRA and 401(k) providers is also easier. 

Reap the tax benefits 

Transferring your 401(k) to your new job can provide significant tax advantages, making it a strategic move for tax minimization. Some tax advantages of rolling over your 401(k) include: 

• Tax-deferred growth: Investments in your 401(k) are protected from annual capital gains and dividend taxes, allowing your investments to grow more rapidly over time than a taxable account.
• Immediate taxation and penalties are avoided: Choosing a direct transfer helps you avoid early withdrawal penalties and preserve your retirement savings from immediate taxation. Additionally, if you add more savings into a Roth 401(k), you can set the stage for tax-free withdrawals once you retire.

Gain control over your investments 

Transferring your old 401(k) to your new job offers a crucial advantage: gaining control over your investments. This control is essential because it empowers you to tailor your retirement savings strategy to your needs and goals.

By rolling your 401(k) to your new job, you can harness the freedom and flexibility to choose how you’d like to invest. This flexibility empowers you to actively manage risk and adapt your strategy to changing market conditions, a level of control that leaving your 401(k) with your old employer may not provide.

Additionally, you could be paying higher fees with your previous employer’s plan. These fees include: 

• Maintenance 
• Fund fees 
• Record keeping 

401(k) transfer considerations  

There’s a lot to think about when considering how you want to get the most out of your retirement savings. Below are some considerations to review before you transfer your 401(k): 

• Limited investment options: Your new employer's 401(k) plan may have a limited selection of investment options compared to your previous plan. If this is the case, this could restrict your ability to diversify your portfolio according to your preferences and risk tolerance.
• Potential tax consequences: Transferring your 401(k) can have tax consequences if not executed correctly. For example, if you take a distribution instead of completing a direct rollover, you may be subject to income tax and early withdrawal penalties.
• The process can be complex: Transferring a 401(k) can be a complex process that involves paperwork, communication with multiple financial institutions, and potential delays. 
• May experience higher fees: Some 401(k) plans have higher administrative fees or fund expenses, which can eat into your investment returns over time. It's essential to compare the fees of your old and new plans before deciding whether to complete a transfer.
• Can be affected by job changes: If you change jobs frequently, transferring a 401(k) to a new job consistently could lead to fragmented retirement savings, making it harder to manage and track your investments. 

Alternatives to transferring your 401(k)

The best choice for how to transfer a 401(K) to a new job depends on your specific financial goals and circumstances. If you prefer an alternative to rolling over your 401(k), explore the options below: 

Leave it with your previous employer

You can choose to leave your 401(k) with your previous employer if they allow it. This option provides continuity in your retirement savings and may be convenient. However, you won't be able to contribute to it or access employer-related benefits.

Pros: 

• Your previous employer may offer a better investment selection that matches your objectives. 
• Avoid time-consuming administrative work to transfer the plan to a new custodian.    

Cons: 

• You’ll no longer be able to contribute to the account, which hinders growth potential.
• You’ll still need to make the required minimum distribution (RMD) once you reach the age of 72 and make income tax payments. 

401(k) cash out 

A 401(k) cash out is also an option (but not for Roth), but you will owe an income tax on the distribution amount. This alternative is not widely recommended since an early withdrawal penalty of 10% is required if you cash out the money before the age of 59 ½ unless you meet one or more of the exceptions from the IRA, which would qualify for a hardship withdrawal. 

Pros: 

• If you qualify for a hardship withdrawal and cash out, you can use your 401(k) to pay for unexpected costs.
• Funds become immediately available after cash out.
• You can put the cash in a more favorable investment, potentially with fewer restrictions.

Cons: 

• Early withdrawals come with a 10% fee. 
• Your funds are no longer protected from debt collectors or bankruptcy if you take them out of your 401(k).
• You interrupt the tax-deferred growth of your investments. 

Take control of your 401(k) transfer

By transferring a 401(k) to a new job, you're not only seized control of your investments but also positioned yourself for potential tax advantages and long-term growth. With a financial planning tool like Playbook, you can build a personal plan to maximize your tax advantages and help your money grow.