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What is a 401(k) Rollover?

Sept. 8, 2014
Brokers, Investing
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Leaving your job? What does this mean for your 401(k) plan? You may want to roll it over into another tax-deferred retirement investment. Find out about when to consider a rollover, your basic options and some issues to be aware of.

Understanding 401(k) rollovers

Rolling over a 401(k) simply means taking the money out of the old employer plan and investing it in a different retirement account. Generally the time to consider this is after changing jobs to maintain control over your investment.

Rollovers can be done two ways:

  • Roll the money into a personal IRA account. This option offers a wide choice of investments such as CDs, stocks, bonds, ETFs and mutual funds to tailor toward your goals and risk tolerance.
  • If the new employer offers its own 401(k) plan, you can roll the money into that account.

If the existing 401(k) is large enough, you may also have the option to simply leave it with your former employer. Typically the minimum for a former employee account is $5,000. This is a good choice if the old plan has good investment options and low fees.

How can I roll over my 401(k)?

The safest way to move 401(k) funds to a new investment is through a direct transfer, which means the money is moved directly from one account to the other without ever passing through your hands. Because you never take possession of the money, direct rollovers can’t be misinterpreted as income at tax time.

To do this, open a new IRA at the financial institution of your choice and select “rollover IRA” as the type of account. If you already have an IRA, another option is filling out a rollover transfer form and investing the funds there. In either case, the new IRA provider handles all the details once the paperwork is filled out. For a direct transfer to a new employee 401(k), simply fill out the form with human resources.

Issues that could cost you

Fees on retirement investments take a real bite out of returns, so be sure to factor this into any rollover decision. It might be better to do nothing and leave money in an old 401(k), if it has great investment options, instead of transferring your savings to a new 401(k).

Additionally, be aware that rollovers have strict government rules, and errors could result in tax penalties. If you’re unable to protect yourself by doing a direct transfer, you have only 60 days to deposit the entirety of the 401(k) funds into an IRA before the IRS adds this money to your income.

Finally, be aware that the IRS has a “same property” rule for rollovers. This means that a distribution will be taxed as income if you withdraw funds from a 401(k), and don’t deposit the funds in a new retirement account.

Unless you’re being forced to close a 401(k) account, rollovers are a matter of personal choice. Understanding laws, fees and investment options will help you make the best choice to achieve your financial retirement goals.


401(k) illustration via Shutterstock.