401k Rollovers – Transferring Your Retirement Investments When Changing Jobs

September 12, 2008

Rolling over your 401k into an IRA is one of the key financial steps when you take a new job. A job change can be one of the most frustrating and overwhelming times of your life; but it can also be one of the most exciting and fulfilling times of your life! Transferring your retirement accounts during a job change is one of the more confusing parts of a job change, so we’ll work through your options, what NOT to do, and some tips about what to research about your new job’s 401k plan.

How To Rollover your 401k to an IRA

  1. Choose a brokerage firm or online brokerage firm to open up a Rollover IRA. ShareBuilder, Scottrade, and Etrade are the most popular online stock brokerage firms that all offer Rollover IRA accounts.
  2. If you already own an IRA account, make sure you open a SEPARATE rollover IRA for your 401k contributions. If you keep the contributions in a separate account, it keeps the money eligible for you to roll it back into your new job’s 401k plan if they allow it. If you roll the money into an existing IRA, the minute you contribute your after-tax dollars to it, that rollover money is no longer eligible to be rolled back into a new 401k account.
  3. Contact your HR department and fill out all of the necessary forms to start the rollover process.
  4. Wait for the money to roll into your new IRA!

Taxes and Penalties for Cashing Out Your 401k Account

It’s very tempting to cash out your 401k account when you leave an old job. However, there are consequences if you take the money and run. If you elect to have a check cut to you for the lump sum amount of the value of the account, you’ll only receive about 60 to 70% of that amount. The lump sum will be taxed based on your tax bracket, PLUS a 10% penalty for early withdrawal. This would be devastating to your retirement account, and it would take years to recover from this tax penalty. DO NOT take this option. Unless you need the money for a dire emergency, resist the temptation.

Things To Consider For Your New Company’s 401k plan:

  • 401k Match: Many employers offer a matching program where they’ll match a certain percentage of the money you invest in your 401k plans. If your new employer will contribute a percentage of your investment in your 401k plan make sure you take advantage of this “free money”.
  • The vesting schedule: ask your new HR department about the vesting schedule for your new 401k plan. You need to know how long it will take for their matching contribution to be all yours. Sometimes, you can negotiate the vesting schedule if your employment involves signing a contract for employment.
  • Investing Options for the 401k: One of the biggest disadvantages of a 401k is that it has limited investment options. This is why I always recommend that people invest in a Roth IRA rather than a 401k if their company does not offer a match. Make sure you get a list of investment options with their detailed information. If the investment options are horrible products with high fees, you may want to skip out on their 401k.
  • When Can You Start Contributing?: Every company has a different policy about when their employees are allowed to jump and jump out of their 401k plans. Some companies use a schedule of every quarter, some use twice a year, and some companies make you wait a certain period of time regardless of the schedule. Make sure you know how long you’ll have to wait before you can start contributing to the new 401k.

Systematic contributions to your retirement account will make you a millionaire. If your account suffers multiple lapses without contributions due to several job changes in your lifetime, you could lose out on thousands of dollars over your lifetime. Staying on top of your 401k plan during a job change is crucial. You don’t want to be penalized 10% plus your tax rate simply because you forgot to think about your retirement plan. If you have any further questions or concerns, comment below or contact us.


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Erik Folgate is a husband and father living in Orlando who's been writing about money online for 6 years. Digging himself out of $20k of debt after college and his former experience in the insurance industry give him some useful insights into personal finance issues.

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3 Responses to 401k Rollovers – Transferring Your Retirement Investments When Changing Jobs

  • Mr. ToughMoneyLove

    Great post. One more suggestion. When joining your new 401(K) plan, be sure to check if it has a Roth option (many now do) which can be an excellent alternative to a Roth IRA


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