Broker Check


May 27, 2024

When you leave your employer, whether voluntarily or involuntarily, one important asset you need to deal with is your 401K. Most people might say, "I didn't do anything" or "I rolled it over to my new employer's plan," but there are actually several options available, each with its own pros and cons. 

Option 1: Roll Over to Your New Employer's 401K 

  • Pros: 

Consolidation: All your retirement funds are in one account, making it easier to manage. 

Potentially Better Investment Options: If your new employer's 401K offers high-return, low-fee investment choices, this can be a great option. 

Loan Availability: Having all your funds in one account can make it easier to take out a loan if needed. 

  • Cons: 

Limited Investment Options: If the new plan doesn’t have great investment choices, consolidating might not be beneficial. 


Option 2: Roll Over to a Traditional IRA 

  • Pros: 

Full Control: You have complete control over your investments. You can invest in anything available through your broker. 

No Tax Penalties: Since both 401K and Traditional IRA are tax-deferred, there are no tax penalties as long as you do it correctly. 

  • Cons: 

No Loan Option: Traditional IRAs do not allow for loans. If you need to borrow money, you must transfer your 401K to a new employer's plan. 


Option 3: Roll Over to a Roth IRA 

  • Pros: 

Full Control: Like a Traditional IRA, you have full control over your investments. 

Tax-Free Withdrawals: Roth IRAs allow for tax-free withdrawals in retirement, which can be advantageous if you expect your tax rate to be higher in the future. 

  • Cons: 

Upfront Taxes: Transferring to a Roth IRA requires paying taxes on the amount rolled over, which can be substantial if your 401K balance is large. 

No Loan Option: Roth IRAs, like Traditional IRAs, do not allow for loans. 


Option 4: Leave the 401K with Your Former Employer 

  • Pros: 

Minimal Effort: If the investment options are good, you might prefer to leave it as is. 

  • Cons: 

Potential Neglect: You might forget about this account, and it can become hard to manage. 

Ongoing Fees: 401K accounts often have fees that you might not be aware of. 

No Loans or Contributions: Once you leave the company, you can't take loans or make further contributions. 


Option 5: Cash Out 

  • Cons: 

High Penalties and Taxes: Cashing out incurs income tax and a 10% early withdrawal penalty if you're under 59½. 

Loss of Future Growth: You lose the potential for tax-deferred growth. 


The Right Way to Transfer: Trustee to Trustee Transfer 

The best way to transfer your 401K is through a "Trustee to Trustee Transfer," where your old plan administrator directly transfers the funds to your new account. This avoids any tax penalties and ensures that the money never enters your personal bank account. 


If the Check is Made Out to You: 

You must deposit it into a new IRA or 401K within 60 days to avoid taxes and penalties. 

IRS limits such transfers to once per year to prevent misuse as a short-term loan. 

In summary, while each option has its advantages and disadvantages, the key is to carefully consider your financial situation and future needs before making a decision. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice.