When it comes to a 401(k), you can take it with you.
In fact, you probably should, in the form of a rollover IRA — an individual retirement account created with funds from an existing 401(k). But making the most of the money you’ve built up means performing the rollover correctly.
Here’s the four-step process for how to turn a 401(k) into a rollover IRA. As with any big decision, it’s always good to know your options before you go all in, so let’s start there.
1. Evaluate your choices
If you’re leaving a job, you have three basic options — none of which allows you to continue contributing to the plan, but all of which ensure that the money you’ve already contributed remains yours:
- Leave it be. If your ex-employer lets you, you can leave the plan right where it is. This isn’t ideal, for a couple of reasons: You’ll no longer have an HR team at your disposal to help you with plan questions, and you may be charged higher 401(k) fees as an ex-employee. (Want to see just how much your 401(k) is costing you? Check out NerdWallet’s 401(k) Fee Analyzer.) In short, leaving your account behind is kind of like leaving money in a savings account at a small-town bank when you’re moving to another state — you can do it, but life will be easier if you don’t. (Use our 401(k) calculator to help with retirement planning.)
- Cash out. We hesitate to list this as an option. Not only does cashing out sabotage your retirement — you’ll lose the power of compound interest, especially if you’re early in your career — but it comes with some brutal penalties and taxes levied by the IRS. You’ll pay a 10% early withdrawal fee, plus ordinary income taxes on the amount distributed. That means you might hand over up to 40% of that money right off the top. Bottom line: Bad idea, if you can avoid it.
- Roll it over. This is the best choice for many people: You can roll your money into either your current employer’s retirement plan or into an IRA, and in most cases, the IRA is the destination of choice. There, you’ll have a wide variety of investment options and low fees, particularly compared with a 401(k) — even the fresh, shiny one at your new employer — which often has tightly curated investment options and administrative fees. The 401(k)-to-IRA rollover is what we’re going to focus on in this post.
» Is your money working for you? Use NerdWallet’s free retirement planning tool to learn how to get your retirement on track.