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How to roll over your 401(k)

What can you do with a 401(k) after you leave a job? Explore your options.

Tags: Investing, Investments, Portfolio management
Published: January 21, 2020

If you’ve recently left your job, you may be wondering what you should do with the funds in your 401(k). You have four options – cash it out, keep your 401(k) with your former employer, rollover your 401(k) into your new employer’s plan, or rollover your 401(k) into an IRA.

Explore the benefits and considerations of each option and consider talking with a financial professional to determine which might work best for you.    

 

1. Cash out your earnings

Benefits:

 Immediate access to your money

Considerations:

❌ Money not available for future retirement needs

❌ May be subject to 20% federal income tax rate

❌ May be subject to 10% federal tax for early withdrawals before age 59½

❌ May be subject to state and local taxes

 

2. Leave funds in your former employer's retirement plan

Benefits:

 Retirement investment continues to grow

 Tax-deferred until withdrawal

Considerations:

❌ Cannot make additional contributions

❌ Subject to different rules than your new employer’s retirement plan

❌ Investment options limited by former employer

❌ Tax penalty for early withdrawals before age 59½

 

3. Transfer funds into your new employer's retirement plan option

Benefits:

 Can continue to make new contributions

✅ Ability to manage rolled-over money and new contributions collectively

 Tax-deferred until withdrawal

Considerations:

❌ Investment options limited by new employer

❌ Tax penalty for early withdrawals before age 59½

 

4. Roll funds into an outside IRA, such as a robo-advisor account

Benefits:

✅ Not restricted by your employer’s retirement plan

 Tax-deferred until withdrawal

✅ Direct rollovers from 401(k) to IRA will not incur federal income tax

Considerations:

❌ Account fees may be higher than employer-sponsored plan

❌ Tax penalty for early withdrawals before age 59½

❌ Indirect rollovers may incur 20% federal income tax

 

 

Additional resources:

Get more details on 401(k) rollovers.

Learn more about the benefits of an IRA

 

A rollover of qualified plan assets into an IRA is not your only option. Before deciding whether to keep an existing plan, or roll assets into an IRA, be sure to consider potential benefits and limitations of all options. These include total fees and expenses, range of investment options available, penalty-free withdrawals, availability of services, protection from creditors, RMD planning, and taxation of employer stock. Discuss rollover options with your tax advisor for tax considerations.