Should I Rollover My 401k?

Should I Rollover My 401Every day someone leaves a job and asks, “should I rollover my 401k?”

Most of the time, the answer is yes.

If you recently left a job, you should probably rollover your 401k.

But there is more than one way to answer this question if you look at it closer. The answer really depends on where you are rolling over that 401k to.

There are many places to put your old 401k funds. You could roll it over into your checking account, a new 401k, a rollover IRA, or even a Roth IRA.

Let’s review each of these moves and answer the question using each location.

Should I Rollover My 401k to an IRA?

The 401k rollover to IRA is the most common type of rollover. You know that commercial with the little green line? This is the type of rollover they are referring to. You take your money from your 401K and put it directly into what’s called a Rollover IRA.

It’s a specific type of traditional IRA where you can stash your old 401k funds. What’s great about this move is that there are no penalties, no taxes, and if you use the right broker, you get a lot more control over your money with much few expenses than if you left the money in your 401k.

Note that even though this is the best way for most people to rollover their 401k, there are some reasons not to do a rollover: you’re retiring early, there are stock options in your 401k, or you’re planning a Roth conversion. If that’s the case, discuss it with your CPA before making the rollover.

Should I Rollover My 401k to a New 401K?

When you leave a job, you are most likely headed to a new one, where you’ll start up a new 401k account. It’s tempting to want to roll your old 401k into your new one. You can do this. And this may be right for you if your ultimate goal is simplicity.

In general, though, 401k’s give you much less flexibility and control than an IRA. Therefore, With less flexibility and control you’ll be less likely to ensure that your funds are being invested according to your needs.

This isn’t a bad move, but in my opinion, it’s not the best.

Should I Rollover My 401k to a Roth IRA?

You can now rollover your 401k directly to a Roth IRA. But because Roth IRAs have a different tax treatment than 401ks and traditional IRAs, you’ll have to pay taxes on the rollover. Don’t let this necessarily scare you away from this move. Roth IRAs have a huge benefit when it comes time to retire.

Study the difference between a 401k and Roth IRA to help you understand if it’s worth it to do a direct rollover to a Roth IRA from your 401k.

Should I Rollover My 401k to Cash?

Unless you are in dire straits you should not rollover your 401k into cash. By doing this you will essentially be taking an early withdrawal. You’ll face a tax penalty from the IRS and you’ll also have to pay taxes as income when you file.

If you receive a check from your old employer for the proceeds from your 401k, be sure to roll it over to an IRA, new 401k, or Roth IRA as soon as possible.

In conclusion, it makes sense to rollover your 401k after you leave your job. Just make sure you roll it over to the right place.

Do you have an old 401k you have yet to rollover? What’s holding you back?

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  1. Avatar 20sFinances says:

    When I plan on leaving my job, I plan to rollover my 403b in a IRA for the sake of convenience and so I can have complete control.

  2. The best thing that anyone can do is know their options fully. Having worked for ‘the little green line,’ I’ve seen many 401k plans and they’re all different. Everyone should get a copy of the Summary Plan Description (SPD) so they know what their options are with the plan while working for the company and what changes occur when they leave. Typically this is available from their benefits department, but sometimes the plan administrator (Fidelity, Vanguard, etc.) will be able to provide a copy — but check with HR first.

  3. I have been sorely tempted to leave my 401k with my former employer because under the plan, they are still required to pay any fees associated with the account. My investment choices are not as open as they would be with a traditional rollover but they are doing fairly well.

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