What to Do With an Old 401(k) Account

When you leave a job, you often face a decision about what to do with your 401(k) or other workplace-based retirement accounts. You could leave it in place (assuming your old company or plan administrator allows ex-employees to do so) or cash it out. But, unless you're retiring and/or need the funds immediately, the smartest course is usually to roll over the account.

A rollover is when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of them, within 60 days, to another eligible retirement plan—generally, a rollover IRA that you set up. That way, you maintain the tax-deferred status of your retirement account, consolidate all retirement accounts for easier management, and—because it's your own account—benefit from increased investment flexibility. Under this option, you would ask your plan administrator to make a direct and tax-free transfer of funds from your former employer’s plan to an IRA at a financial institution of your choice.

Key Takeaways

  • When leaving your job, a rollover of 401(k) retirement plan funds into a rollover individual retirement account (IRA) is generally the most advantageous strategy.
  • At your direction, your employer can transfer your 401(k) directly to the IRA, avoiding tax payments and penalties.
  • Many banks, brokerages, and investment firms offer cash bonuses and free trades if you establish a rollover IRA with them; the more you invest, the bigger the perks.

The Big Choice

Ah, but which financial institution should you choose? IRAs are big business for banks and investment companies. Many firms offer incentives, in the form of matches and bonuses, to encourage you to sign up with them.

Although the deals vary, certain conditions are standard. To qualify for the perks, most institutions require you to deposit the money within 60 days of opening the account (which you'd want to do anyway, to avoid being taxed on the withdrawal from your old account). All you need is for the account to remain open and fully funded with the initial bonus amount for at least 12 months, or else the bonus will be reversed.

You can often roll over assets "in kind," meaning the stocks, bonds, or mutual funds you own in your 401(k) are transferred directly to the new rollover IRA; however, some assets, such as proprietary funds or company stock options, might have to be liquidated.

Below are four financial institutions offering particularly nice cash bonuses for rolling over your retirement account. This listing is current as of April 2020, but terms and conditions change all the time. So think of this list as a general reference guide for the sort of incentives that are out there and how they work. Of course, when considering one of these places—or any specific institution—be sure to read the fine print in the contract before you set up an account.

Also, be sure to open the right type of IRA: If you have a traditional 401(k) plan, you'll want to open a traditional IRA; if any of your 401(k) is set up as a Roth, those funds should go to a Roth IRA. Some people will need to open both types of accounts.

TD Ameritrade

If you are interested in rolling assets into a self-managed trading financial institution, TD Ameritrade would be an excellent option. The company offers multiple different thresholds for its bonus program besides providing the most significant cash bonus out of all the IRA rollover incentive programs in the industry.

At a minimum, if you roll at least $10,000 or more into an IRA, you qualify for 90 days of commission-free trades (up to a maximum of 300 trades). If you have a balance of $1 million or more from your 401(k) or retirement plan to transfer, TD Ameritrade will add a bonus of $2,500 into your new rollover IRA. Below are the threshold levels and corresponding cash bonus amounts. Each of these bonuses comes with commission-free trades.

  • $2,500 cash bonus for $1 million or more deposit
  • $1,200 cash bonus for $500,000–$999,999 deposit
  • $600 cash bonus for $250,000–$499,999 deposit
  • $300 cash bonus for $100,000–$249,999 deposit
  • $100 cash bonus for $25,000–$99,999 deposit

Merrill Edge

Merrill Edge is the digital, self-directed investment subsidiary of Bank of America and the brokerage company Merrill Lynch. Merrill Edge has seen success through its cross-selling to current Bank of America clients who report finding it easy to incorporate its services into their current bank accounts.

Merrill Edge will pay a cash bonus if you deposit a qualifying amount into either an IRA or non-qualified account called a cash management account (CMA). If you deposit a minimum of $20,000, Merrill Edge offers a cash bonus of $100 (or $150 for Preferred Rewards members), if you meet the requirements for 90 days.

Below is the list of the qualifying asset deposit levels and cash bonus amounts.

  • $600 cash bonus for $200,000 or more deposit
  • $250 cash bonus for $100,000–$199,999 deposit
  • $150 cash bonus for $50,000–$99,999 deposit
  • $100 cash bonus for $20,000–$49,999 deposit

Ally Bank

Ally Bank is a popular choice for customers seeking higher-than-average yields on certificates of deposit (CD) and savings accounts, enhanced by the fact that the online bank charges no maintenance fees on most accounts either. Ally is offering cash bonuses for new self-directed trading accounts, including rollovers from a 401(k). According to its website, if you open an account and fund it within 60 days of opening, Ally will give you a cash bonus of up to $3,500 and up to 90 days of commission-free trades.

The minimum qualifying deposit is $10,000, which will earn you $50, and the 60 days of free trades. For those with more to invest, Ally is offering as much as $3,500 if you deposit $2 million or more. Other offers on new deposits include:

  • $3,500 + free trades: $2M+
  • $2,500 + free trades: $1M–$1.99M
  • $1,200 + free trades: $500k–$999.9k
  • $600 + free trades: $250k–$499.9k
  • $300 + free trades: $100k–$249.9k
  • $200 + free trades: $25k–$99.9k
  • $50 + free trades: $10k–$24.9k

Fidelity Investments

Fidelity Investments, best known for its mutual funds, also offers extensive brokerage services. With more than $8.3 trillion in assets under management, Fidelity offers low-cost commission fees on most trades, and more than 500 commission-free ETFs. Currently, according to its website, it's enhancing that with two years' worth of free trades to new and existing customers who roll over funds into a new IRA or brokerage account.

The terms are:

  • 300 trades for deposits of $50,000–$99,999
  • 500 trades for deposits over $100,000

Having two years in which to conduct the trades is quite a generous time span, compared to the 90 days other firms offer.

Fidelity isn't currently offering cash bonuses for rollover accounts, though it has in the past.