When you change jobs (which many people have over the last few years), you may not quite know what to do about your old 401k. Your old employer most likely didn’t tell you anything, and your new employer may have had one line in the middle of your benefit package.
Depending on your old employer’s guidelines, you usually have these options:
1. Keep your 401k with your old employer (usually if you meet a minimum dollar amount, such as $5,000)
2. Transfer your 401k to your new employer’s plan
3. Roll over your 401k into a Rollover IRA (depending on the 401k type, there may be restrictions)
4. Cash out your 401k (Typically available if you don’t meet the minimum dollar amount)
What’s Your Best 401k Option
I’m a firm believer that the best option for your 401k when you change jobs is to roll it over into an IRA.
If you have a regular 401k, you can roll it over into a Rollover IRA.
If you have a Roth 401k, you can roll it over into a Roth IRA.
The reason I believe this is the best option for most is that a IRA gives you a lot of investing options with minimal expenses. Many brokers offer no-fee IRAs, which means that just putting your money into an IRA will be cheaper than leaving it with your old employer. Being in an IRA also allows you to invest in a myriad of low cost index funds, which are probably a better investment from a cost perspective than what your current and former employers offered.
How to Do It
Actually transferring your 401k over to an IRA is pretty simple. Usually, the broker where you are moving the 401k to will take care of everything for you. It just requires filling out several forms. Then, usually you just have to fill out a form letting your old 401k know to be expecting a transfer, and you’re done. The whole process usually takes about 1 week.
Don’t Ever Do Option #4
Option #4 is cashing out your 401k. Don’t ever do this option. First, you will be subject to all kinds of taxes and penalties on the money, which makes it just not worth it. Second, it is so easy to just transfer your account to an IRA, so just do it!
Readers, what has been your experience rolling over your 401k?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.