Your Step-by-Step Guide to Rollover Options and Tax Consequences

Switching jobs can be both exciting and nerve-wracking—new opportunities, new challenges, but also a lot of logistical changes. One thing that often gets overlooked in the hustle of transitioning to a new role is what to do with your 401(k).
As a financial advisor at Manna Wealth Management, I’ve helped many clients navigate the decision-making process when it comes to their retirement savings. It’s important to make an informed choice about what happens to your 401(k) so that your future savings continue to grow and you avoid unnecessary taxes or penalties.
Here’s a step-by-step guide to what happens to your 401(k) when you switch jobs—and how to make the best choice for your financial future.

1. Can You Leave Your 401(k) with Your Previous Employer?

Yes, in many cases.
Once you leave a company, your 401(k) account doesn’t automatically vanish. Most employers will allow you to keep your funds in the old plan, provided you have more than $5,000 in the account. You won’t be able to contribute to this plan anymore, but your funds can remain there and continue to grow, subject to the plan’s investment options.

Pros of Leaving Your 401(k) Behind:
• Familiarity: You already know the plan options and how it works.
• Continue tax-deferred growth: Your money can still grow in a tax-advantaged way.

Cons of Leaving Your 401(k) Behind:
• Limited control: You can’t make new contributions, and your investment options may be more limited than other options.
• Higher fees: Some 401(k) plans charge higher fees for former employees than current employees, which can eat into your returns over time.
If you’re happy with your old plan’s performance and fees, leaving your 401(k) with your previous employer might be a simple option. But if you want more flexibility or better investment choices, there are other options you should consider.
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2. Rolling Over Your 401(k) to a New Employer’s Plan

What is a rollover?
A rollover involves transferring your old 401(k) funds into your new employer’s 401(k) plan. This can be a great option if your new employer offers a plan with better investment options or lower fees.

Steps for a Rollover:
1. Contact the new plan administrator and ask for instructions on how to complete a 401(k) rollover.
2. Request a direct rollover to avoid unnecessary tax consequences. A direct rollover means the funds move directly from your old plan to the new one, without you ever touching the money.
3. Choose your investment options within the new plan. Be sure to review the plan’s options and fees to ensure they align with your goals.

Pros of Rolling Over to a New Employer’s Plan:
• Continued tax-deferred growth: Your funds will continue to grow tax-deferred, as with the previous employer’s plan.
• Consolidation: It’s easier to track and manage your retirement savings if everything is in one place.
• Employer match: If your new employer offers a match, you can start taking advantage of it right away.
Cons of Rolling Over to a New Employer’s Plan:
• Limited control: Just like your previous employer’s plan, the new one will still have limited investment options and fees that you may not have full control over.
• Complexity: If your new employer doesn’t offer a 401(k) plan, or if you leave your job before the 401(k) is fully vested, the rollover process could be more complicated.
If you’re happy with your new employer’s plan, this option could provide a smooth transition and continued growth.
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3. Rolling Over Your 401(k) to an IRA (Individual Retirement Account)

One of the most popular options for people switching jobs is rolling over your 401(k) into an IRA. This allows you to take full control of your retirement funds with access to a broader range of investment options.

Steps for a 401(k) to IRA Rollover:
1. Open an IRA account: You can do this with any financial institution, like Vanguard, Fidelity, or Charles Schwab. Choose the type of IRA—Traditional or Roth—based on your tax situation.
2. Request a direct rollover from your 401(k) to the IRA. Be sure to specify that you don’t want taxes withheld (so it’s a tax-free transfer).
3. Select your investments: With an IRA, you can invest in stocks, bonds, mutual funds, ETFs, and more, depending on the provider.
4. Monitor your account: Review your portfolio periodically to ensure it stays aligned with your retirement goals.

Pros of Rolling Over to an IRA:
• More investment options: IRAs give you access to a wider range of investments than a typical 401(k) plan.
• Lower fees: Many IRAs have lower fees than 401(k) plans, which means more of your money stays invested.
• More control: You can control your asset allocation and choose investments that match your risk tolerance.

Cons of Rolling Over to an IRA:
• No employer match: Unlike a 401(k), there’s no employer contribution to an IRA.
• Required Minimum Distributions (RMDs): With traditional IRAs, you’ll have to start taking RMDs once you turn 73 (unless you’re still working and contributing to the IRA).
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4. Cash Out Your 401(k)

While cashing out your 401(k) might sound tempting—especially if you need money urgently—it’s almost always the worst financial decision you can make.

Why You Shouldn’t Cash Out:
• Taxes and penalties: If you’re under 59½, you’ll face a 10% early withdrawal penalty on top of regular income tax on the distribution.
• Lost growth: By cashing out, you’re essentially stopping your retirement savings from growing, which can have long-term consequences.
• Retirement goals derailed: Taking the money out now means you’re robbing yourself of future security.

What to Do Instead:
It’s almost always better to roll over the 401(k) to a new employer’s plan or an IRA. If you absolutely need access to the money, consider a loan from your 401(k) if your plan allows it (but be cautious about repayment terms).
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5. What Are the Tax Consequences of Each Option?

Here’s a quick breakdown of the tax implications:
• Leave it in your old employer’s 401(k): No immediate tax consequences.
• Roll it over to a new employer’s 401(k): No immediate tax consequences, and your money continues to grow tax-deferred.
• Roll it over to an IRA: No immediate tax consequences if done correctly (direct rollover). Funds continue to grow tax-deferred.
• Cash out your 401(k): You’ll pay ordinary income taxes plus a 10% penalty if you’re under age 59½. This option also means you miss out on future compound growth.
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👋 Final Thoughts from David Kassir

Switching jobs is an exciting time, but it’s essential to consider the best way to manage your 401(k). Whether you decide to roll it over, leave it behind, or cash out (which I highly recommend avoiding), understanding your options will help you make a choice that aligns with your long-term financial goals.
If you need personalized guidance on your 401(k) rollover or want to explore the best options for your retirement, reach out to Manna Wealth Management. We’ll help you make informed decisions to secure your financial future.