Enter your old employer to find your 401(k) and start your free rollover.
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By Stang Gappa
Updated on June 12, 2024
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Navigating retirement accounts, from 401(k) plans to Individual Retirement Accounts (IRAs), can feel overwhelming, particularly when career transitions lead to the question of what to do with retirement savings from an old 401(k).
Should you leave it as it is, roll it over into a new 401(k) or an IRA, or even cash it out? Each option has unique benefits and drawbacks, along with complex tax implications, contribution limits, and sometimes, time constraints.
Understanding these nuances can help you make a smart decision for your financial future and ensure compliance with IRS regulations to avoid penalties. Let’s demystify the process, examining the different strategies and considerations for handling your 401(k) after leaving a job.
First, there is no set time limit to roll over your 401(k) retirement account once you’ve left your employer. Many people do leave their 401(k) account in their old employer’s plan. A recent Capitalize study estimates that there are over 29 million left behind or forgotten 401(k) accounts as of May 2023.
That said, if you elect to roll over your 401(k) into an IRA, there can be a time limit on how long you have to transfer those funds into your IRA account. If you choose to do an indirect 401(k) to IRA rollover, you’ll have 60 days to make sure those funds are transferred into your IRA account. This is called the 60-day rule, and we’ll cover that below. Before we get to it, let’s look at the options you have for your old 401(k).
Some of your options for your old 401(k) include:
We’ll discuss each of these options more in depth below.
As long as you remember that the account exists and the 401(k) plan offers a nice selection of investments with low fees within that financial institution, you have every right to leave your existing retirement savings plan as is.
Leaving it alone might be a fine option if it’s administratively complicated to move the account.
Transferring, or rolling over your 401(k) to an IRA is a common choice for people starting a new job, especially if they want to break entirely from their previous employer. The investment menu tends to be a bit wider at most IRA providers since most IRAs include options to invest in mutual funds, ETFs, and other classes that may not be available in your old plan, so this option is appealing in certain circumstances. Note that tax consequences may arise depending on the type of IRA account you’re rolling into.
Sometimes new employer plans will allow you to “roll in” your previous employer’s plan. This can be an easy way to consolidate if you want everything in one place — assuming the tax status of the two accounts is the same for the rollover contribution. For example, rolling a traditional, pre-tax 401(k) into a traditional pre-tax IRA would trigger no tax consequences in the rollover process. There are pros and cons to rolling over a 401(k) into a new 401(k) plan to be aware of.
Depending on your needs, you can cash out your 401(k) — but beware that this comes with taxes and penalties from the IRS if you’re under age 59 ½.
If you are age 55 or older, most (if not all 401(k)) plans will allow you to follow the Rule of 55, which allows penalty-free distributions from your 401(k) after you attain age 55. Note that you’ll also need to be separated from your employer for this to be on the table.
401(k) plans tend to be very employer-specific: that is, you may have additional options depending on the rules of your specific plan. For instance, some plans may allow loans with certain caveats. To find out if you have any other options, it’s best to contact your 401(k) plan administrator directly.
There are a limited number of circumstances where your employer may have the right to move your money without your consent. If your balance is less than $1,000, your employer may send you a check for the balance; if your balance is less than $5,000, they may have the ability to roll it into an IRA of their choice. Make sure to read the details of your 401(k) plan if your balances are in this range.
If you undertake a direct rollover from your current 401(k) provider into an IRA, there is no rollover time limit to complete the transaction of your rollover contribution.
However, if you plan to do an indirect rollover, you could need to follow the 60-day rule. As discussed, you have the following rollover options:
A direct rollover involves moving money from 401(k) plan-to-plan or from a 401(k) to an IRA retirement savings account and is the recommended way to roll over an old 401(k). Usually, it happens in one of two ways:
You’ll contact your former employer-sponsored retirement plan provider and request a check for the entire account balance made out to your new provider (for your benefit) as a rollover contribution. They’ll send a check directly to your new company and deposit it into your new account. No taxes are withheld and it’s generally considered penalty-free and rollover fees are fairly uncommon.
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You’ll request a check in the same manner described above (made out to your new provider for your benefit), except you’ll receive the check directly and will be required to forward it along to your new company yourself. Again, no taxes are withheld and it’s generally considered penalty-free.
An indirect rollover is a bit more complex and can get you into hot water if you don’t follow certain rollover rules carefully. It’s usually best to first speak with a tax advisor to understand potential tax penalties.
You’ll request a check from the old employer’s retirement plan 401(k), except in this case the money is paid directly to you as an individual. Taxes will be withheld. Then, you’ll need to deposit the full amount withdrawn, before taxes, into a new 401(k) or IRA retirement savings account within 60 days to avoid taxes and early withdrawal penalties (if you’re not yet at retirement age).
In other words, if you have a $100,000 401(k) balance and request an indirect rollover, your plan administrator will send you a check less any tax withholding (usually 20%). You’d receive $80,000 in your bank account in this example.
But to avoid taxes and penalties, you’d need to roll over $100,000 to a new retirement account within 60 days of your initial withdrawal. You’d then receive your tax withholding back when you file your tax return.
Given the complexities of indirect rollovers, direct rollovers are typically recommended.
The main advantage is that you’ll have time to re-evaluate your new circumstances before changing your financial accounts. Leaving a job is often a milestone life event, so you may want to focus on a new role or life chapter before rearranging your finances and optimizing your available investment choices.
You’ll also have time to consider any tax consequences of rolling over your account. Careless planning can lead to unforeseen tax consequences — like a big tax bill — so be sure to know the mechanics of your rollover before you start filling out the paperwork to aim for a tax-free transfer. You’ll also want to consider your 401(k) vesting period and applicable rules if you haven’t yet left your employer.
If your previous employer-sponsored retirement plan had expensive investment options or high fees, consider moving the money to an IRA or your new 401(k) plan as soon as possible. The longer you leave the money there, the more the fees will eat away at your hard-earned investment returns.
Next, leaving the account at your old employer can sometimes lead to it being forgotten. At the same time, a financial life with scattered accounts is much more difficult to manage. It’s smart to consolidate to the extent possible and be proactive about optimizing the number of accounts you have.
There usually isn’t a lot of upside associated with waiting, so it’s a good idea to create a plan and consolidate it as soon as is practical for you. If you decide not to roll over your old 401(k), make sure it’s an active choice. So whatever you decide to do, be sure to give it some thought first
The 60-day rollover rule applies to indirect rollovers and is usually used to take a short-term loan from your retirement plan. You don’t necessarily have to leave a job to attempt an indirect rollover.
Say you withdraw money from your 401(k) and receive it directly into your bank account.
Within 60 days, you’ll need to deposit the entire amount withdrawn, before taxes, to a new retirement plan to avoid taxation (and an early withdrawal penalty if it’s an early distribution). When you take money out of a retirement plan early, you’re subject to a 10% penalty if you’re below 59 ½, unless it’s for a qualified exception.
Due to the nature of indirect rollovers, you’re only allowed to complete one per 12-month period. This one-per-12-month rule only applies to indirect rollovers, not the more traditional direct rollovers as described above.
Note that this does not mean you only have 60 days to roll over your 401(k) after leaving a job. This time limit only applies to indirect rollovers. Many leave old 401(k) plans in place for years before deciding to move them.
The significant takeaway is that a direct rollover is your best bet for rolling over an old 401(k), while an indirect rollover is more applicable for taking a short-term loan from your retirement plan — one that you’re absolutely sure you can pay back!
Say you withdraw $50,000 in retirement funds from your employer’s 401(k) plan in an attempt to complete an indirect rollover. 20% of the withdrawal ($10,000) is withheld for federal taxes.
It’s your responsibility to deposit the full $50,000 to your new retirement plan (even though you only received $40,000) within 60 days or you’ll be liable for taxes and penalties on the distribution.
Failure to pay back the full amount could result in the entire withdrawal being labeled as taxable income, taxed at your ordinary income rate. Again, if you’re below 59 ½, you’ll also face an early withdrawal penalty of an additional 10%. Note that these are general rules and there may be exceptions.
Yes. Direct rollovers — where money is moved from provider to provider — are not subject to this rule. You’re simply moving tax-advantaged money from one company to another. There’s no true withdrawal taking place to disturb the tax-advantaged status of the account.
Conversions from traditional IRAs (or tax-deferred) to Roth IRAs (after-tax) are exempt from this rule. If you convert some of your pre-tax retirement investment money to post-tax retirement money, that’s a separate action independent from any rollover activity.
Read more on Traditional vs. Roth IRAs here.
Managing your finances amidst a job change can be an overwhelming undertaking. Knowing the options you have for your old 401(k) can help you start to make an informed decision. Rest assured that there isn’t a set time limit on rolling over your 401(k) unless you’ve begun the process and need to adhere to the 60-day rule.
If you’re considering rolling over your old 401(k), Capitalize can manage the entire process for you – for free. From finding your old 401(k) provider to helping you select the IRA account that best suits your needs, they can manage the entire process and save you time.
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