When you leave a job, you can have up to three options for your 401(k) account if you want to keep growing the savings tax-free until retirement: leave it in your old 401(k) plan, roll it to a new employer’s plan, or roll it to an IRA. While a rollover might seem like the obvious choice, leaving your savings in the old plan could sometimes mean more savings in the long run.
Making smart decisions about rolling over your 401(k) is crucial because the fees and investment options can vary widely between different plans and IRAs. This FAQ is designed to help you make the best decision for your financial future.
A 401(k) rollover involves transferring funds from a 401(k) plan to another retirement account, such as a new employer's 401(k) plan or Individual Retirement Account (IRA). The rollover process allows you to maintain the tax-deferred status of your retirement savings.
You can rollover funds from an old 401(k) plan to a new 401(k) plan or IRA either directly or indirectly. The direct method is more common and less complicated.
A "distributable event," such as termination of employment, must occur before you can rollover a 401(k) account. Distributable events can vary by plan and are detailed in the plan’s Summary Plan Description. Only "eligible rollover distributions" can be rolled over. Most 401(k) distributions meet the definition except for the following:
To maximize your retirement over time, you want to invest your savings in a 401(k) account or IRA with three features:
A 401(k) or IRA with these features could add tens of thousands of dollars of compound interest to your future saving compared to a 401(k) or IRA with excessive fees and underperforming active funds. You don’t want to settle for less when considering a 401(k) rollover.
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Feature |
401(k) plan |
IRA |
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Investment options |
Your options are limited to the menu selected by your employer. That is not necessarily a bad thing. Employers have a fiduciary responsibility to select a “prudent” investments. A prudent investment is simply a fund that meets its investment objective for reasonable fees. However, this fiduciary responsibility does not guarantee a prudent investment menu. In fact, imprudent investment selection is one of the top causes of 401(k) lawsuits today. |
In general, your options are nearly limitless. However, some IRA providers will restrict your options to proprietary investments. Most IRA providers have no legal obligation to limit your investments to prudent options. |
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Professional Investment advice |
Your employer selects the form of advice available. Most plans offer at least one of the three basic forms - Target-Date Funds (TDFs), a financial advisor, or “robo” (algorithm-based) advice.
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You select the form you want. |
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Administration Fees |
Varies based on who pays the fees— the employer or participants. 401(k) plans are more prone to hidden fees than IRAs.
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Usually low, especially if proprietary fund restrictions apply. |
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May allow loans for active employees. |
Loans not permitted. |
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Withdrawals allowed without penalty after age 55 if separated from service. Penalty-free withdrawals allowed only after age 59 ½ unless an exception applies.
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Penalty-free withdrawals allowed only after age 59 ½ unless an exception applies.
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Must start at age 73, can be postponed if still employed and not a business owner. |
Start at age 73 for traditional IRAs; not required for Roth IRAs until death of the owner. |
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Creditor protection |
Federally protected from most creditors. |
Protection depends on state laws. |
Roth contributions are subject to stricter rollover rules than traditional (pre-tax) contributions. A Roth account can only be rolled to a Roth IRA or 401(k) plan that permits Roth rollovers.
You can have up to three options for your savings when you are eligible for a 401(k) rollover. The best option for you will depend upon the investments and features you want and the cost of your options:
Choose this option under the following circumstances:
If you have a small balance, this option may not be available. Some plans include a force-out provision. If your balance is below your plan’s force-out threshold, your former employer can involuntarily roll your savings to an IRA on your behalf.
If your new employer’s 401(k) plan permits rollovers, you may want to consider moving your savings to their plan under the following circumstances:
Choose this option under the following circumstances:
This month, the U.S. Government Accountability Office (GAO) released a report to Congress examining the effectiveness of the 402(f) notice - which 401(k) plans must provide to terminated participants to explain their distribution options. Among other things, the report found that nearly 60% of terminated participants who rolled over their savings to a new 401(k) plan or IRA were unaware they could have left their savings in their old plan.
This confusion could cost an investor dearly in retirement if they roll their savings from a low-cost 401(k) plan to an overpriced plan or IRA. Our FAQ is designed to help you navigate these decisions and make the best choice for your financial future.