How to rollover a 401K as a new employee

Starting a new job is an involved process. You need to fill out tax forms, study the orientation package, review your duties and responsibilities, and get to know new coworkers. Your 401K rollover is also part of this transition. It can easily get overlooked when you’re immersing yourself with a new company. In this article, we’ll go over some essential steps to roll over your 401(k) as a new employee.

Review your rollover options

The human resources department at your new employer should have a process in place to rollover the 401(k) from your previous employer into their own. Some employees choose to keep their plan at their previous employer because they have invested company stock with unrealized gains. A rollover would trigger a tax liability on those gains.

Another option is to roll the 401(k) over into an IRA. Contributions to a traditional IRA are made with pre-tax dollars, so they can lower your income tax liability. Contributions to a Roth IRA are made after taxes are taken, so distributions in retirement are tax-free. Speak to your accountant or tax preparer to find out more about these options.

You could of course simply cash the old plan out, but that will cost you a 10% early withdrawal penalty if you’re under 59 ½ years old. It also takes a long time to build up savings, so your future self will thank you if you leave your money in a retirement fund. If you need cash, ask your plan administrator if you can borrow against your invested funds.

Choose a direct rollover or transfer by check

Rolling over a 401(k) from employer to employer is typically done as a direct transfer. There’s no need for you to do anything except sign the necessary paperwork. Direct rollovers can also be moved into a traditional IRA or Roth IRA. In both cases, the holdings in your existing account will be sold, so you’ll need to choose new investments when the funds rollover.

A second option is to take a check from your previous employer and deposit it into the new employer’s 401(k) account. There are transfer rules that apply in this scenario. For instance, there’s a mandatory 20% tax withholding and a 10% penalty if you don’t deposit the funds into the new account within sixty days. Consider that carefully before choosing this option.

Select your investment funds

Your new 401K provider should provide you a list of options for investment funds. The old investments you had at your previous employer will have been liquidated when the rollover was done, essentially converting your funds to cash. Choosing new investments should be done quickly so you don’t miss out on potential gains that could enhance your retirement.

You don’t need to be a finance expert. 401(k) providers typically give you a few options based on your risk tolerance. For instance, a conservative fund might contain low-risk bonds and mutual funds, whereas an aggressive fund would have more equities and alternatives. Your choice is how conservative or aggressive you want to be. The provider manages the investments.

The Bottom Line

A 401(k) rollover should be one of the tasks at the top of your to-do list when you start a new job. You can do a direct rollover into the new employer’s 401(k) fund or take a check from the old company and deposit into your new retirement account. The latter option comes with a 20% tax withholding and a potential 10% penalty if you don’t make the deposit within sixty days.

You can also rollover into a traditional IRA or Roth IRA. In both cases, as with a 401(k) rollover, you’ll need to choose investment funds once the account transfer is complete. 401(k) providers give you choices for managed funds based on your risk tolerance. With self-managed IRAs, you’ll need to pick the investments yourself. Ask your financial advisor which is best for you.