Should You Roll Over an Old 401(k) to a New 401(k)?

You don’t have to leave your 401(k) behind when changing jobs.

Employers offer 401(k) plans, with their tax advantages, as a benefit to attract and retain talent. Increasingly, however, Americans with 401(k)s are not working with one company for their entire career. Today, people generally stay at a company for about 4.1 years, according to the U.S. Bureau of Labor Statistics.

Employees who change jobs can roll over their 401(k) from their previous employer to their new employer with a direct trustee-to-trustee transfer. But they must make the rollover within 60 days and abide by other rules for this process. This strategy has advantages and potential downsides to consider.

Key Takeaways

  • When you move to a new job, you can roll over your 401(k) from your previous employer.
  • Rolling over an existing 401(k) can make it easier to manage your account.
  • A potential downside to rolling over a 401(k) is that you could lose some investment options.
  • You must roll over a 401(k) within 60 days or face tax implications.

Options for an Old 401(k)

A 401(k) retirement plan is designed to last through your career until your retirement, when you start making withdrawals. Regardless of whether you were laid off, fired, or left of your own volition, you are entitled to 100% of your personal 401(k) contributions. You can decide where those funds go when you leave a job.

You have four main options for what to do with your 401(k) when you leave your employer. Each option has benefits and drawbacks.

What You Can Do with a 401(k) from Your Old Employer
   Pros Cons
Cash it out Flexibility with how to use the funds Tax implications for withdrawals before retirement age
Leave the account with your old employer Maintains investments; no transfer process Must manage account with old employer along with any new account
Roll over to a traditional individual retirement account (IRA) or Roth IRA Investments get similar tax advantages May lose investment options from old employer
Roll over to your new employer’s 401(k) plan Investments get similar tax advantages; easy to manage account May lose some investment options from old employer

If you have $1,000 to $5,000, your former employer can move funds from your 401(k) to an individual retirement account (IRA) of its choice. If you have less than $1,000, it can simply cut you a check. If you receive a check, you’ll need to put it into a tax-advantaged retirement account within 60 days to avoid penalties.

Indirect Rollover vs. Direct Rollover

There are two methods you can use to roll over an old 401(k) into a new one: an indirect rollover or a direct rollover.

A direct rollover is when the money in your old account is directly transmitted to your new account without you ever touching the funds. To do this, you can reach out to the plan administrator and ask them to transfer the funds to another retirement plan without any taxes being withheld.

An indirect rollover occurs when you receive a check in your name covering the full amount of your previous 401(k). When you receive that check, you have 60 days to deposit the funds into a new retirement plan, whether that’s a new 401(k) or a different retirement plan altogether. Financial institutions typically withhold around 20% in taxes. When you make your deposit, you must make sure to include that 20%; otherwise, it could be considered an early distribution and you could face penalties.

Benefits to Rolling Over to a New 401(k)

Rolling over an old 401(k) to a new one has several advantages:

  • Potentially more cost effective: Each 401(k) is different. Compare costs between your old plan and the new one. In many cases, your new plan may be more cost effective.
  • Easier management: It’s generally easier to manage one account vs. multiple accounts. By rolling over your old retirement plan into your new employer’s 401(k) plan, you can keep all of the information in one place. A recent study by Capitalize estimated that there were 24.3 million forgotten 401(k) accounts holding $1.35 trillion in assets as of May 2021.
  • Advantages of the “rule of 55”: If you retire or lose your job when you’re 55 years old, you can take funds out of your retirement fund without suffering any penalties. This is called the “rule of 55,” and it only applies to your latest employer. Funds from an earlier employer’s plan are not eligible.
  • Continued growth can compound: By rolling over your old 401(k) into a new one, you can ensure that you’ll continue earning interest on those funds. Over time, compounding interest will help your retirement account grow.

Downsides to Rolling Over to a New 401(k)

  • Potentially different rules: Your new employer will have control over the new plan and can change aspects of it, such as fees and the plan administrator.
  • Possibility of higher fees: Higher fees can cut into your earnings. Be sure to check out the fee structure before opting to roll over into the new plan.
  • Loss of investment options: The number of investment options in 401(k) plans have declined in recent years. This means that other retirement plans like IRAs could offer a wider range of investments that you can use to diversify. A new 401(k) plan may not offer the same investment choices as your original plan.

What else can I do with a 401(k) when leaving a job?

In addition to rolling over your 401(k) into a new plan, your can roll the 401(k) into a new or existing individual retirement account (IRA), leave it as is with your old employer, or cash it out. Each option has its pros and cons to consider.

What fees and taxes would I pay if I cash out my 401(k)?

Cashing out a 401(k) is akin to an early distribution in the view of the Internal Revenue Service (IRS). Taking such a step means that your withdrawals will be taxed at the state and federal level as income. In addition, unless you’re age 59½ or older, the IRS charges a 10% penalty for an early withdrawal.

How can I find old 401(k) accounts?

If you forget about an old 401(k) altogether, or If you believe you have a 401(k) that has been lost, you can take steps to find it. If your old employer is still in business, you can contact them directly for any information. You can also try reaching out to the plan holder. Another option includes using your state’s database of unclaimed 401(k) plans.

The Bottom Line

A 401(k) provides a valuable savings tool to help you reach your retirement goals. You can roll over a 401(k) to a new 401(k), but before you do, consider all your options. You can also cash it out, roll it over to an IRA held by yourself, or leave it with your original employer. Each of these options has pros and cons to consider.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. U.S. Bureau of Labor Statistics. “Employee Tenure Summary.”

  2. Internal Revenue Service. “Rollovers of Retirement Plan and IRA Distributions.”

  3. U.S. Department of Labor. “What You Should Know About Your Retirement Plan,” Page 21 (Page 25 of PDF).

  4. Capitalize. “The True Cost of Forgotten 401(k) Accounts.”

  5. Internal Revenue Service. “Retirement Topics — Significant Ages for Retirement Plan Participants.”

  6. Society for Human Resource Management. “Number of 401(k) Funds Offered to Plan Participants Shrinks.”

  7. Fidelity. “Considerations for an Old 401(k).”

  8. Internal Revenue Service. “Here’s What People Should Know About Taking Early Withdrawals from Retirement Plans.”

  9. National Association of Unclaimed Property Administrators. “Search for Your Unclaimed Property (It’s Free).”

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