What to Know When Rolling Over a 401k?

If you are changing jobs and moving on to a new employer, you could be wondering what you can do with your 401(k) plan. Leaving behind your 401(k) could be an option, but you won't be able to make further contributions to the plan. If you want to keep growing your retirement savings, you should consider rolling over your 401(k).

If you decide to roll over your 401(k), you should transfer your retirement money to a qualified retirement account such as a 401(k) or IRA. If you rollover to an IRA, you get a wider selection of investment options to help you diversify your portfolio. Remember, you can only rollover the vested portion of your 401(k) money. If you have any unvested portion of the employer’s contributions in your 401(k), you will be forced to forfeit it. 

Key Considerations When Making a 401(k) Rollover

Here are some of the things you should consider when making a 401(k) rollover:

Your balance

Depending on your 401(k) balance, your former employer may give you more or less time to decide what to do with the money. If you have $5000 or more in your 401(k), you may decide to leave your money with the former employer as you figure out what to do with the money.

However, if the balance is below $5000 (but more than $1000), the employer may make a forced transfer to its IRA. If the balance is below $1000, the employer will close the account and send you a check with your 401(k) balance. You must deposit the money in a new retirement account within 60 days.

Where to rollover

If your new employer accepts rollovers, you must open a new 401(k) that will receive the distribution. You can then contact the previous employer and request a direct rollover to your new account.

If you are looking for greater flexibility with your retirement money, you should rollover the 401(k) to an IRA. You can choose to rollover to a traditional IRA, and your money will continue growing tax-deferred until when you make a withdrawal. However, if you decide to rollover the 401(k) into a Roth IRA, you will be required to pay taxes on the entire rollover amount.

401(k) fund transfers

When rolling over 401(k), you have a choice between a direct rollover and an indirect rollover. A direct rollover moves retirement savings directly between two retirement accounts, and the account holder does not get into contact with the money. This transfer takes several days or weeks, and it does not create a tax liability.

With an indirect rollover, the employer disburses your 401(k) money by check. You must deposit the money into a qualified retirement account within 60 days from the date the check was sent. If you are unable to deposit the money within 60 days, the money will be considered a distribution, and you will owe taxes on the money.

Does Vesting Period Affect 401(k) Rollover?

If you receive matching contributions from your employer, you could be required to complete specific years of service to be fully vested. Depending on the company’s vesting schedule, you may be required to complete two to six years of service to be fully vested.

If you leave the company and decide to rollover your 401(k) money, you can only rollover the vested balance. For example, if you are 60% vested when you leave your job, you can only rollover 100% of your contributions and 60% of the employer’s contributions. However, you will forfeit the 40% unvested portion of the employer’s contributions.

401(k) Rollover When You Have Company Stock

Employers may offer company stock as a matching contribution instead of making cash contributions to the employee's 401(k) account. If you have stock in your 401(k) account, there are different tax rules depending on what you do with the stock.

If you rollover the company stock to an IRA, you lose the potential tax advantages on any growth the stock had in the 401(k). Although you won’t pay taxes when you rollover, you will pay tax on the full value of the stock when the stock is sold. The stock is taxed at the long-term capital gains tax rate.

For example, assume that you have 2000 shares at a cost basis of $10 and the share price has appreciated to $40 when you decide to sell. This means the value of company stock has increased from $20,000 to $80,000. Assuming a capital tax rate of 20%, it means you will pay $16,000 (20% x $80,000).

Is There a Limit on How Much You Can Rollover From a 401(k)?

There is no limit on the amount of retirement savings you can rollover to a traditional or Roth IRA. You can rollover your entire 401(k) balance into a qualified retirement amount, regardless of the amount of savings you have accumulated. However, once you have completed the rollover, you can only contribute to the 401(k) account up to the annual contribution limit.