A new job can be a great move for your finances, but it may take a while to figure out how to best allocate your funds going forward. You might need to create a new budget and you'll have to decide what to do with your old 401(k) as well. Let's take a look at all your options to help you make the right call for your retirement funds.
1. Leave your old 401(k) alone
Perhaps the simplest solution for most people switching jobs is to leave their old 401(k) where it is. Most plans enable you to do this as long as you have at least $5,000 in the account. Once you leave your old job, you'll no longer be able to contribute money to the account, but the savings you've already invested will continue to grow.
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This could be the right call if you like your old plan. But if it charges high fees or you worry you might forget about it over time, it's better to go with one of the other options listed below.
2. Roll it over to your new 401(k)
You may be able to roll your old 401(k) funds over into your new 401(k) if your company offers one. But first, you must make sure you're eligible to contribute to your new 401(k) and the plan allows rollovers. Some companies require their employees to work for the company for a certain number of months before they're eligible to participate in the 401(k). If you can't contribute right away, you may have to wait to do your rollover.
In addition, some plans don't allow you to roll over funds from an old 401(k). If this isn't a possibility for you, you will either have to leave your savings in your old 401(k) or transfer it to an IRA, as discussed below.
If you decide to roll your old 401(k) funds into your new 401(k), you'll need to choose between a direct and an indirect rollover. A direct rollover is the best choice for most people. To do this, you provide your old 401(k) provider with information about where you'd like your funds sent and it handles the transfer for you. You will need to pay a small, one-time fee for this and fill out a form with your old 401(k) provider.
An indirect 401(k) rollover is where you cash out your old 401(k) and then deposit the funds into the new account yourself. This is riskier than a direct rollover because if you fail to deposit the funds in the new account within 60 days, the government considers your withdrawal a distribution. You'll pay taxes on it, plus a 10% early withdrawal penalty if you're under 59 1/2.
3. Roll it over to an IRA
Rolling your old 401(k) funds over into an IRA gives you more freedom to invest your money how you want. It's a great alternative to rolling your funds into a new 401(k) if your new plan doesn't allow this. Like 401(k)-to-401(k) transfers, you may choose between a direct and an indirect rollover, but direct rollovers are often safer.
It's usually easiest to roll your old 401(k) funds over into an IRA that's taxed the same way. Traditional 401(k)s are tax-deferred, which means you don't pay taxes on your contributions in the year you make them. But you do owe taxes on your withdrawals later. If you have this type of 401(k), you'll probably want a traditional IRA.
If you have a Roth 401(k), which allows for tax-free retirement withdrawals but doesn't give upfront tax breaks, you can roll your savings over into a Roth IRA. These accounts are also funded with after-tax dollars.
It is possible to roll traditional 401(k) funds into a Roth IRA, but if you do this, you'll pay taxes on the full balance you're rolling over that year. That's because you're effectively doing a Roth IRA conversion.
You don't have to make your decision right away. You could leave your money in your old 401(k) while you get acclimated to your new job and then transfer the funds later. Just make sure you don't forget about your old account altogether.
