Personal Finance

5 min read

July 05, 2020

How To Roll Over a 401K

Decipher the mystery behind rolling over your 401k investment

banner image

Leaving one job and starting another is always a hectic situation. You have to pick a health insurance plan, begin to understand the company culture and figure out your new responsibilities - often before you have a chance to even learn where the nearest restroom is.

In all this confusion, there’s often a step that people forget about: rolling over their 401(k) from the previous employer. It’s one of the most crucial steps to take when leaving a company, but it can be confusing and more than a little complicated.

Thankfully, we’re here to walk you through the process. Here’s what you should know.

Why You Should Roll Over Your 401(k)

When you start a new job, it’s easy to forget about the 401(k) from your previous employer. If you have more than $5,000 in the account, there’s nothing stopping you from keeping the money there. But this can be a costly mistake.

Some 401(k) providers charge more fees if you’re no longer a current employee. When you don’t move a 401(k), you also lose the ability to rebalance your funds. This could leave you with a larger amount of stock funds than is appropriate for someone your age.

To avoid these issues, you can roll over the 401(k) into your new employer’s 401(k) or into an IRA. It’s best to choose an IRA because there are more investing options, allowing you to avoid funds with high fees or low returns.

How to Open an IRA and Roll Over Your 401(k)

If you have less than $1,000 in your old 401(k), the plan provider will likely automatically cash it out for you. When that happens, you have 60 days after the disbursement has been made to deposit the check into your new 401(k) or IRA.

If you don’t have access to a 401(k) at your new employer, work in a self-employed capacity or want more freedom, then you should consider opening an IRA. Companies like Vanguard, Charles Schwab or Fidelity are popular IRA providers.

When you open an account at one of these firms, you’ll have to manually select which funds you want to invest in. If you don’t make this decision, the money will sit in your cash settlement account where it won’t have the chance to grow in the market.

If you’re not sure what to invest in, a target-date fund is an easy option. Target-date funds hold a mix of stock and bond funds, automatically realigning over time based on your desired retirement date. It will hold a higher percentage of stock funds when you’re younger and then shift to a higher percentage of bond funds as you get older.

If you’re completely overwhelmed by investing, opening an IRA with a robo advisor may be a less stressful option. The robo advisor will ask a series of questions about your current investments, desired retirement age and risk tolerance. It will then select a series of funds based on your answers and determine what percentage should be invested in each.

The robo advisor will also suggest how much to save each month to reach your retirement goals. Most robo advisors have low fees and a broad swath of index funds. Reputable robo advisors include Betterment, Wealthfront and Ellevest.

Investors who want more hand-holding can hire a financial planner to roll over the 401(k), open an IRA and select the appropriate funds. A financial planner may charge a few hundred dollars for these services, but it’s a worthwhile investment for someone who otherwise wouldn’t make those changes. You can find a qualified financial planner through the search tool at the National Association of Personal Financial Advisors (NAPFA).

How to Roll Over a 401(k)

There are two ways to roll over a 401(k).

First, the provider of the old 401(k) can close the account and send the check to you. You then have 60 days to move that money to a new 401(k) or IRA. If you don’t deposit the money within 60 days and are younger than 59.5, it will count as an early withdrawal. You’ll owe a 10% penalty and may have to pay taxes on the amount withdrawn. If you have a Roth 401(k), you’ll only owe taxes on the earnings and not the contributions.

Second, you can do a direct transfer. This occurs when the provider of the old 401(k) sends the funds directly to the new 401(k) or IRA company. The transfer is made electronically, and the process is almost always free. The direct transfer method is preferable because it doesn’t involve the extra step of depositing the money yourself. There’s no chance that you’ll miss the 60-day deadline and end up owing taxes along with a 10% penalty. Not every 401(k) provider will perform a direct transfer. If that’s the case, you’ll have to manually deposit the check into your new IRA or 401(k).

Why You Shouldn’t Cash Out Your 401(k)

Some people decide not to roll over their 401(k) into a new account and instead use the funds to buy a house, pay off debt or beef up their emergency fund. A 2018 report from E-Trade Financial found that 60% of people age 18-34 had withdrawn money from their 401(k) at some point.

While many investors take withdrawals to pay for a medical emergency or to help them survive while they’re unemployed, 20% of those surveyed said they cashed out their 401(k) early to pay for a vacation or to spend money on themselves or their family. Cashing out your 401(k) early can have dire consequences for your future. Not only will you owe the 10% penalty and income tax, you’ll also be affecting your future investment portfolio. Every dollar you withdraw is a dollar that can’t earn money in the stock market.

If you’re struggling with medical bills or other loans, look for every possible solution before tapping your 401(k). This may include setting up a payment plan with the hospital or extending the loan’s term.

Since most Americans already save less than they should for retirement, tapping a 401(k) will only exacernoissuebate their inability to retire.


Share this article

Zina Kumok
Zina Kumok
Zina Kumok has written for outlets such as Investopedia, Credit Karma, and Learnvest. Her expertise has been featured in Glamour, BBC, and Nerdwallet.

Your Money, Simplified.

Earn 5.00% on cash deposits & 5% cashback on top brands like Uber and Instacart

Create a free Juno account within 3 mins

Juno (CapitalJ Inc.) is a financial technology company, not a bank. Certain services are offered through Synapse Financial Technologies, Inc. and its affiliates (“Synapse”). Brokerage accounts and cash management programs are provided through Synapse Brokerage LLC (“Synapse Brokerage”), an SEC-registered broker-dealer and member of FINRA and SIPC. Additional information about Synapse Brokerage can be found on FINRA’s BrokerCheck. See Synapse Terms of Service, Privacy Policy, and the applicable disclosures and agreements available in Synapse’s Disclosure Library for more information. The Partner Financial Institution(s) participating in a Synapse cash management program are referred to in your Synapse Brokerage Customer Agreement.

Digital Asset services are provided by Zero Hash, which is not affiliated with Juno or Synapse. Digital Assets are highly speculative in nature, involve a high degree of risk and can rapidly and significantly decrease in value. It is reasonably possible for the value of Digital Assets to decrease to zero or near zero. Digital Assets held in your Zero Hash account are not protected by FDIC insurance or any other government-backed or third party insurance.

The Juno card is issued by Evolve Bank & Trust, Member FDIC, pursuant to license by Mastercard International.

© Copyright 2024 Juno by CapitalJ, Inc