The Financial Skinny: 401(k) Rollovers

Good news, you’ve got a new job. Ever better news, you’re leaving your old job, with an employer-sponsored 401(K,) for another with the same sweet deal. It’s a great position to be in but one that carries some important decisions. In the middle of handling your transition from office to office, you’ll also have to consider what to do with your retirement funds. Do you keep the money with your old employer, withdraw it or roll it over to an account with your new employer  – and where do you get started?

Here’s the skinny.

Weigh Your Options

Odds are if you’ve been with your employer for a while, you probably have sizable funds in your account. That’s the beauty of a 401(k); the money accrues with little work on your end. That downside of set-it-and-forget-it accounts is that you’re probably out of the loop when it comes to managing them. Now that you’re leaving your job, it’s important to dig in and weigh your options. You have the option to withdraw the funds, let the money sit, or roll it over into an individual retirement account or your new employer’s 401(k.)

Risks to Withdrawing

Best to avoid withdrawing your retirement funds, except for in an extreme emergency – primarily because of the associated fees and penalties. On every withdraw you’ll have to pay taxes at your marginal rate and a 10% penalty if you’re not yet 59 and half years old.  Given your financial needs in retirement, better to consider one of the other routes.

Do Nothing

Your money will continue growing even if you just leave it in the account sponsored by your old employer. The downside is that you can no longer add money to portfolio or make changes. Some plans may even charge an extra maintenance fee when you’re no longer with the company.

Roll it Over

Another way to continue growing your investment is to roll it into an individual retirement account (IRA) or your new employer’s 401(k.) A major benefit for rolling it over is consolidation. After all, if one account is hard to track, imagine two. Plus, you’ll avoid unnecessary fees, taxes and penalties. You can also manage the money better by adding to it every month and adjusting the allocation. Moving the funds in an old 401(k) to an IRA is fairly simple. Contact the company that runs your old 401(k) and request that they perform a “direct rollover” into your new IRA or 401(k). That means the money will be wired directly and not distributed first, which can result in those penalties and taxes discussed above. For this process, all that’s likely required is your contact information and the account and routing numbers for your new account.

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