How to manage your 401(k) is one of the biggest decisions you face when changing jobs. If your new employer offers the option to roll over your 401(k) from your previous employer—some 401(K) plans do not allow for transfers—this may be the best option for you. Before deciding, read below to learn how to assess your situation and how the rollover process works.
Your 401(k) Balance and Your Past Employer
Before you leave your employer, confirm your 401(k) balance with your plan administrator. If your balance is below $5,000, your previous company can remove you from the plan at their discretion. If your balance is over $5,000, you have the legal right to keep your account with your previous employer. However, you most likely will not be permitted to contribute more funds to your account and your previous employer may impose other limitations or fees that make this a poor option. Also be familiar with your previous company’s vesting schedule. If your employer offered contribution matching, you may not be entitled to all the funds if you are not fully vested in your program. Knowing your account balance, the percentage you are vested and other plan policies ensures you take control of your 401(k) account and make all of your decisions within the time frame available to you.
Your 401(k) and Your New Employer
Policies vary between 401(k) plans and employers. When you start your new job, consult with the plan administrator to confirm transferring your 401(k) is allowed. Also determine if you have a waiting period before you can participate in the new 401(k) plan. Waiting periods range from a few months to a year. When talking to your new plan administrator, also ask about employer contribution matching policies. If you have to wait too long to contribute funds to your retirement account, or if your plan does not include matching benefits, then rolling over your 401(k) to your new employer may not be the best retirement savings decision for you.
Other factors to consider include fees, investment opportunities and additional services provided through the plan. If your new plan has higher fees, less desirable investment options and fewer services, you may want to consider keeping your account with your past employer or shifting your funds to an individual retirement account (IRA). Your goal should be to move your retirement account to an investment plan that offers equal if not better opportunities for overall growth than your current plan. If rolling over your 401(k) means accepting an inferior plan, this is not the best fit for you.
How 401(k) Rollovers Work
Your 401(k) account may be transferred to your new plan as either a direct rollover or indirect rollover. A direct rollover occurs when the funds from the old account are sent directly to the new account manager. This type of transfer is known as a trustee-to-trustee transfer. A direct rollover is generally considered the most preferred method to transfer funds.
An indirect rollover is when your funds pass through you first via a check from your previous plan provider. Once you receive the check you have 60 days to deposit the funds in your new account. If you miss the 60-day deadline, the check is considered a disbursement, and you may owe income tax on the money. In addition, the plan provider may be required to withhold 20% of the account balance to meet tax requirements. The withheld funds may lead to further taxes and more costs for you to manage.
Our team at Wickham Financial & Insurance Services is available to discuss the advantages and disadvantages of rolling over your 401(k) to your new employer. As noted above, your individual situation and investment goals weigh heavily on whether or not this type of rollover is the right choice for you. With our years of experience, and our relationship-based approach to service, we will work with you to find the best retirement savings plan for you.
Any information provided has been prepared from sources believed to be reliable but is not guaranteed, does not represent all available data necessary for making investment decisions and is for informational purposes only.