401(k) Rollover Options: What to Do if You Lose or Change Your Job?

Those who quit their jobs or transition to a new job must decide about their 401(k) rollover. After quitting a job, deciding about the 401(k) may seem like a low-priority item. But financial experts advise weighing your options and deciding as early as possible to make the most of your hard-earned money.

The first step is to learn more about the 401(k) rollover options. Awareness about the consequences of choosing one option against the other makes the decision easier. While there is always some guidance from human resources, the final decision is up to you. Here’s a look at the different choices you can make for your 401(k) rollover :

Key Choices for a 401(k) Rollover

Before you look at the options, make sure you don’t have a pending loan on your 401(k). If you have a 401(k) loan, you must repay it before your tax due date after leaving your job. Otherwise, you must pay tax on the balance amount and an early withdrawal fee. Each of the options listed below has its own advantages and disadvantages. Consider the implications carefully before making a choice.

  1. Rollover into a New Company’s 401(k) Plan– A common choice for those switching jobs. You can ask for a direct transfer or have your old employer transfer your 401(k) to your new employer. The transfer should be completed within sixty days to avoid tax implications. Before you choose this option, take a moment to understand your new plan’s fees, rules, and investment options.

You must choose this option only if your new employer’s 401(k) plan is better than your old employer’s. Otherwise, exploring other options, like the mega backdoor Roth IRAmay be worthwhile.

  1. Rollover into a Traditional IRA – For those who are leaving the workforce or those who don’t have an employer who offers a 401(k) plan. The transfer can be done with the help of a bank or brokerage firm. There are various benefits of moving your money to an IRA account. For example, you can withdraw money penalty-free until the age of 59.5. You can also withdraw money for a first-time home purchase or higher education expenses.
  2. Rollover and Convert to a Roth IRA – A Roth IRA is popular among salaried individuals for its tax advantages. In a Roth IRA, you are not liable to pay any taxes on gains when the money is withdrawn in retirement. There are various estate planning advantages and no RMDs. However, rolling over your money from a traditional 401(k) to a Roth IRA can lead to significant tax expenditure. Rolling over your money to a Roth IRA is most suited to those with money in a Roth 401(k).
  3. Rollover into an Annuity – Roll over your 401(k) into an annuity to avoid unnecessary tax expenditure. Annuity promises a stable income and guaranteed return. Participants who invest in an annuity, receive a regular pension-like income. Check the sales contract to ensure it does not include high sales commissions, and keep the lock-in period in mind. Withdrawing before the end of the lock-in period calls for a high surrender fee.
  4. Cash it Out –One of the simplest ways of dealing with your 401(k) is to cash out when you quit or leave your job. However, cashing out before age 59.5 means paying taxes on the entire balance and an early withdrawal penalty. So, it is usually not advisable to cash out your 401(k) when leaving a job.

What to Consider When Rolling Over a 401(k)?

Weigh all the available options and their attributes before taking a decision. To make the decision easier for you, here are some questions you can ask 

  1. Does the new rollover account have any features that offer you an advantage over your existing 401(k) account? Rollover only if you get some helpful features that offer convenience and an advantage over your existing 401(k) account.
  2. Is it essential that you consolidate all your money in one place? If yes, it makes sense to roll over your money to a new account.
  3. Can you conveniently manage your finances if you roll over your 401(k) to an IRA? Usually, you must manage the funds yourself or hire someone to do it for you.
  4. IRA and 401(k) offer different benefits because they serve different purposes. If you choose to roll over to IRA instead of a 401(k) plan, are you okay with losing the benefits of 401(k)?

In conclusion, we can safely say that there is no one right option for 401(k) rollover that can work for everyone. Make a decision based on the benefits and drawbacks of the different options available to you. Keep the tax implications in mind and think about the long term. Talk to human resource representatives for guidance and make an informed decision.

If you have a financial advisor, you should also discuss the options with them to know their opinion. Careful planning and diligent saving can help you build a secure financial future.

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