How Does a 401(k) Rollover Work?

Leah BuryMay 3, 2021


If you have recently gotten a new job and you have a 401(k) at your old job, rolling over that money into an IRA could be a good way to stay organized, maximize your retirement savings, and make your money work harder. But how does a 401(k) rollover work?

How Does a 401(k) Rollover Work?

There are two types of rollovers: direct and indirect.

Direct rollovers

In a direct rollover, money goes directly from your old account to your new account. First, you tell your new provider that you’d like to initiate a rollover fund. Then, you tell your current 401(k) plan administrator you’d like to rollover your 401(k) into a new account. Your old administrator will either mail or electronically deliver the check to your new provider. The funds are deposited into your new plan, and no taxes are owed.

Indirect rollovers

In an indirect rollover, the funds come to you to re-deposit. You tell your new provider that you’d like to initiate a rollover, and then you tell your old 401(k) administrator that you’d like them to empty your account. Your old administrator will mail a check to you, and 20% is withheld to prepay your taxes in case you miss the 60-day deadline. You deposit the funds into your bank account, and then make a check out to the new provider. The check must be for the full account balance, so you must come up with the 20% that is being withheld. If you deposit the funds within the required 60-day time period, you will get that 20% back at tax time.

What are your options for a 401(k) rollover?

When you leave a job, you have a few options for what you can do with your existing 401(k) account. You can either cash it out, leave it where it is, transfer it to your new employer’s 401(k) plan account, or roll it over into an individual retirement account (IRA). Here are some details on those options.

  • Cashing out: When you cash out before 59 ½, or before meeting certain other requirements, you’ll be taxed on the money as ordinary income. at your current tax rate. There’s an additional 10% penalty to pay if you withdraw early, unless you are completely retired and at least 55.
  • Leave it where it is: You might have the option to leave it with your employer, however: you may have decreased access, increased fees, or other complications.
  • Transfer it to a new 401(k): This rolls over into your new plan relatively easily. Your old plan will send your new employer’s plan a check.
  • Rollover to an IRA: There are two different kinds of IRAs: traditional and Roth. Both have the same yearly contribution limit: $6,000. Traditional IRAs are tax-deferred, meaning the money is only taxed when it’s withdrawn. Roth IRAs are contributed to with after-tax dollars, so none of your withdrawals will be subject to tax. Rolling over a 401(k) to an IRA generally requires an indirect rollover.

Advantages of a 401(k) rollover

Regardless of whether you roll your 401(k) over to another 401(k) or an IRA, it has several benefits.

Regardless of whether you roll your 401(k) over to another 401(k) or an IRA, it has several benefits. ”

More investment options

In some cases, employer-provided 401(k) plans can be strict. The investments might be limited to only a handful of options, making it difficult to have a well-diversified portfolio.

When you rollover an old 401(k), you can potentially open yourself up to more investment options, including mutual funds, individual stocks, bonds, and exchange-traded funds (ETFs). Depending on the new provider, you could gain access to thousands of new investment options.

Reduced expenses

If you keep your old 401(k) with your employer, you’ll still have the pay the associated fees—even if you’re not actively contributing. Even worse, you may be charged more of those fees, since you’re no longer an employee! These fees can include account-level fees, fund expenses, and trading fees. Some charge fees can be in excess of 1% of your assets each year.

If you transfer the money from your old retirement account into a new 401(k) or IRA, you may save some money on fees. IRAs in particular tend to have lower administrative costs, and they give you more freedom to invest your money how you choose.

Simplified record-keeping

It can be hard to keep track of everything when you have accounts in different places. Important memos can get lost in your inbox easily, which could result in added fees. You may even completely forget about old 401(k)s.

When you consolidate your 401(k) or retirement accounts in general, you greatly reduce the time spent on record keeping. You also reduce the risk of missing important notifications. In addition, when you age, your risk tolerance declines, and you may need to readjust the allocation of your assets. This is a lot easier to do when you can see everything in one place.

Make a 401(k) Rollover Work for You

Unless you’ve stayed in the same job for a very long time, there is a good likelihood that you’ve had to consider what to do with your 401(k) when you moved jobs. There are several options, but a 401(k) rollover is a great way to keep your retirement savings organized and make your money work harder.

Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer Member FINRA/SIPC and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

Before deciding whether to retain assets in an employer-sponsored plan or rollover to an IRA an investor should consider various factors including but not limited to: investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Before you elect to open an IRA account and engage your investment representative, please review all account statements and disclosure documents related to the IRA and services to be provided under a new relationship and consult with a qualified tax advisor as needed. If transferring an existing retirement plan into an IRA, you should be aware that (i) Those assets will no longer be subject to the protections of ERISA (if applicable) (ii) depending on the investments and services selected for the IRA, you may pay more or less in transaction costs than when the assets are in the Plan, (iii) if you are between the age of 55 and 59 ½, you would lose the ability to potentially take penalty-free withdrawals from the plan, (iv) if you continue working past age 70 ½ and transferred your plan assets to a new employer’s plan, you would not be subject to required minimum distribution and (v) withdrawing assets directly would be subject to federal and applicable state and local taxes and possibly be subject to the IRS penalty of 10% if under age 59 ½.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018.

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Leah Bury

Leah is a financial writer based in Austin, Texas. Her articles include advice on investing in real estate, starting small businesses, and optimizing savings. Leah also does some freelance graphic social media work for local creatives.