What Can I Do with My 401(k)?

When you have an employer-sponsored retirement account, like a 401(k) or 403(b), it is important to know your options if you leave your job. After all, you want to keep and manage your investments without having to pay a penalty for making the wrong choice. Your options include:

  • Take a cash distribution (and pay a large penalty)
  • Leave your account with your previous employer
  • Transfer it to your new employer’s plan (if possible)
  • Rollover your retirement plan into an IRA

Should I keep my 401(k) with my employer?

There are several benefits to rolling over your 401k to an IRA:

  • More Investment Choices – In general, a 401(k) offers limited investment options. These options may include a handful of mutual funds and perhaps asset allocation mutual fund models based on your retirement date. However, when you roll your savings into an IRA, the world of available investment options broadens to include individual stocks, exchange-traded funds (ETFs), bonds, and other investments, including income-producing real estate.
  • Personalized Attention and Professional Management – When you roll your money into an IRA, you receive personalized service and a custom investment plan from your financial advisor. To realize your personal financial goals, your advisor may also incorporate your IRA in your overall estate plan. Some 401(k) plans have an option for professional management at an extra cost, but there are still limited investment opportunities. Additionally, most 401(k) plans won’t give you access to a personal advisor to provide you with customized portfolio management.
  • Lower Fees and Costs – In many instances, you can save fees by rolling into an IRA. 401(k)s incur costs for management and administration, in addition to the fees of mutual fund ratios. Fund expense ratios are not deducted from your account. Rather, they occur at the fund level, impacting your investment return.

While there are benefits to Rollover IRAs, there are also benefits of not rolling your 401(k) into an IRA:

  1. Lower Fees and Costs – If you participate in a large company plan, it is possible that your 401(k) is indeed less expensive than an IRA. More plan participants means more buying power. Fees can be negotiated with plan providers, and large dollar amounts can earn plans the right to participate in institutional class funds, which generally have lower expense ratios.
  2. Legal Protection – One of the biggest advantages to not rolling over is legal protection against creditors. Federal law protects 401(k) funds from most types of creditor judgements. Exceptions include IRS tax liens and spousal or child support orders.Federal law only protects IRAs against bankruptcy for up to $1 million (inflation-adjusted to $1,333,272 as of Nov 2020). Protections against other judgements vary from state to state and may differ depending on the type of IRA.
  3. Early Retirement Benefits – You may access funds in your 401k as early as age 55 without paying a 10% penalty. However, once you rollover to an IRA, you must wait until age 59 ½ to avoid paying a penalty.
  4. 401(k) Loans – If your plan allows for loans, often your loan will come due as soon as you are no longer employed by your company. Many companies will allow you to continue to make payments. However, if you roll over, your loan balance will typically be due in full.

How do I know if I’m eligible for a Rollover IRA?

Generally, anyone who has left their current employer and has benefits in a retirement plan is eligible for a Rollover IRA. Each employer retirement plan is unique. It is best to check with your retirement plan representative, usually someone in HR, on the specifics of your plan.

What are my rollover options?

Depending on the type of plan, your rollover options for IRAs may be different.

Employer PlansRollover Options
Designated Roth Account (401(k), 403(b), 457(b)YesNoNoYesYes
403(b) (pre-tax)YesYesYesYesYes
Qualified Plan (pre-tax)YesYesYesYesYes
Governmental 457(b)YesYesYesYesYes

What is the difference between a direct and indirect rollover?

A direct rollover is when you transfer your money directly from one retirement account to another. In these cases, no money is withheld for taxes; the transfer is tax-free.

In comparison, an indirect rollover occurs when you cash out your old retirement plan. Typically, you receive a check of your balance from the administrator. Then, you have 60 days to re-invest the funds into a new retirement account to avoid taxes and penalties.

However, if you’re under age 59½, you will pay an additional 10% penalty tax. Beginning in 2015, indirect rollovers are limited by the one-rollover-per-year rule.

How do I complete a rollover?

To complete a rollover, simply contact your financial advisor who will assist you with the rollover paperwork. You may need to make a joint call to your previous plan administrator to assist with the rollover.

The bottom line

Many people who are switching jobs can benefit from rolling over a 401(k) into an IRA, often in the form of lower fees, a broader investment selection or both. But every retirement plan—the former and current employer’s 401(k) and the IRA offered by a bank or brokerage—is different. So, it’s important to weigh the pros and cons before making this decision.

Trust and Investment products are not federally insured, are not obligations of or guaranteed by the credit union or any affiliated entity, involve investment risks, including the possible loss of principal. This is for informational purposes only and is not intended to provide legal or tax advice regarding your situation. For legal or tax advice, please consult your attorney and/or accountant.